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"The end to the U.S. Government shutdown, reports of progress on China-U.S. trade talks, and the Federal Reserve’s confirmation that it did not plan further interest rate hikes in 2019 allayed investor fears and drove U.S. markets substantially higher in the first quarter of the year. Global markets followed suit pretty much across the board delivering what some market participants described as a “V-shaped” recovery," This is how Evermore Global Value summarized the first quarter in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.
Hedge fund interest in Steven Madden, Ltd. (NASDAQ:SHOO) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Dorman Products Inc. (NASDAQ:DORM), Cleveland-Cliffs Inc (NYSE:CLF), and NuStar Energy L.P. (NYSE:NS) to gather more data points.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let's take a glance at the recent hedge fund action regarding Steven Madden, Ltd. (NASDAQ:SHOO).
What have hedge funds been doing with Steven Madden, Ltd. (NASDAQ:SHOO)?
At Q1's end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SHOO over the last 15 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in Steven Madden, Ltd. (NASDAQ:SHOO) was held by Arrowstreet Capital, which reported holding $15.5 million worth of stock at the end of March. It was followed by GLG Partners with a $9.4 million position. Other investors bullish on the company included AQR Capital Management, D E Shaw, and Winton Capital Management.
Since Steven Madden, Ltd. (NASDAQ:SHOO) has experienced bearish sentiment from the smart money, it's easy to see that there is a sect of funds that elected to cut their entire stakes in the third quarter. At the top of the heap, Benjamin A. Smith's Laurion Capital Management dumped the biggest position of the "upper crust" of funds watched by Insider Monkey, worth about $1 million in stock. Joel Greenblatt's fund, Gotham Asset Management, also dumped its stock, about $0.8 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Steven Madden, Ltd. (NASDAQ:SHOO) but similarly valued. These stocks are Dorman Products Inc. (NASDAQ:DORM), Cleveland-Cliffs Inc (NYSE:CLF), NuStar Energy L.P. (NYSE:NS), and Trinity Industries, Inc. (NYSE:TRN). This group of stocks' market values are similar to SHOO's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DORM,15,72393,3 CLF,35,464839,6 NS,1,1376,-1 TRN,28,700327,1 Average,19.75,309734,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $310 million. That figure was $62 million in SHOO's case. Cleveland-Cliffs Inc (NYSE:CLF) is the most popular stock in this table. On the other hand NuStar Energy L.P. (NYSE:NS) is the least popular one with only 1 bullish hedge fund positions. Steven Madden, Ltd. (NASDAQ:SHOO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately SHOO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SHOO investors were disappointed as the stock returned -9.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
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