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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Skechers USA Inc (NYSE:SKX).
Is Skechers USA Inc (NYSE:SKX) a sound investment right now? Money managers were in an optimistic mood. The number of bullish hedge fund positions moved up by 7 recently. Skechers USA Inc (NYSE:SKX) was in 33 hedge funds' portfolios at the end of June. The all time high for this statistics is 36. Our calculations also showed that SKX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Robert Pohly of Samlyn Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's view the fresh hedge fund action regarding Skechers USA Inc (NYSE:SKX).
What does smart money think about Skechers USA Inc (NYSE:SKX)?
At Q2's end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 27% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in SKX a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Brett Barakett's Tremblant Capital has the biggest position in Skechers USA Inc (NYSE:SKX), worth close to $136.1 million, amounting to 5.7% of its total 13F portfolio. The second most bullish fund manager is John Smith Clark of Southpoint Capital Advisors, with a $103.6 million position; the fund has 2.5% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish comprise Paul Marshall and Ian Wace's Marshall Wace LLP, and Robert Pohly's Samlyn Capital. In terms of the portfolio weights assigned to each position Tremblant Capital allocated the biggest weight to Skechers USA Inc (NYSE:SKX), around 5.72% of its 13F portfolio. Intrepid Capital Management is also relatively very bullish on the stock, designating 4.81 percent of its 13F equity portfolio to SKX.
Now, key hedge funds have jumped into Skechers USA Inc (NYSE:SKX) headfirst. Broad Peak Investment Holdings, managed by Hyder Ahmad, created the biggest position in Skechers USA Inc (NYSE:SKX). Broad Peak Investment Holdings had $39 million invested in the company at the end of the quarter. Charles de Vaulx's International Value Advisers also initiated a $26.3 million position during the quarter. The following funds were also among the new SKX investors: Robert Bishop's Impala Asset Management, Lee Ainslie's Maverick Capital, and Jinghua Yan's TwinBeech Capital.
Let's now take a look at hedge fund activity in other stocks similar to Skechers USA Inc (NYSE:SKX). We will take a look at Invesco Ltd. (NYSE:IVZ), People's United Financial, Inc. (NASDAQ:PBCT), First Industrial Realty Trust, Inc. (NYSE:FR), Novavax, Inc. (NASDAQ:NVAX), Oshkosh Corporation (NYSE:OSK), Sasol Limited (NYSE:SSL), and Grupo Aval Acciones y Valores S.A. (NYSE:AVAL). This group of stocks' market caps are closest to SKX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IVZ,22,161181,-4 PBCT,24,89424,2 FR,30,356250,6 NVAX,18,733714,14 OSK,27,206936,5 SSL,10,35736,1 AVAL,9,12468,4 Average,20,227958,4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $228 million. That figure was $625 million in SKX's case. First Industrial Realty Trust, Inc. (NYSE:FR) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Skechers USA Inc (NYSE:SKX) is more popular among hedge funds. Our overall hedge fund sentiment score for SKX is 87.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately SKX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on SKX were disappointed as the stock returned 1.1% since the end of the second quarter (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.