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Did Hedge Funds Drop The Ball On Skechers USA Inc (SKX) ?

It was a rough fourth quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 18.7% so far in 2019 and outperformed the S&P 500 ETF by 6.6 percentage points. We are done processing the latest 13f filings and in this article we will study how hedge fund sentiment towards Skechers USA Inc (NYSE:SKX) changed during the first quarter.

Is Skechers USA Inc (NYSE:SKX) the right investment to pursue these days? The best stock pickers are turning less bullish. The number of long hedge fund bets were trimmed by 1 in recent months. Our calculations also showed that skx isn’t among the 30 most popular stocks among hedge funds. SKX was in 24 hedge funds’ portfolios at the end of the first quarter of 2019. There were 25 hedge funds in our database with SKX positions at the end of the previous quarter.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

We’re going to take a look at the recent hedge fund action surrounding Skechers USA Inc (NYSE:SKX).

How are hedge funds trading Skechers USA Inc (NYSE:SKX)?

Heading into the second quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SKX over the last 15 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with SKX Positions

More specifically, Tremblant Capital was the largest shareholder of Skechers USA Inc (NYSE:SKX), with a stake worth $65.7 million reported as of the end of March. Trailing Tremblant Capital was AQR Capital Management, which amassed a stake valued at $59.2 million. Arrowstreet Capital, Millennium Management, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Skechers USA Inc (NYSE:SKX) has faced declining sentiment from hedge fund managers, logic holds that there was a specific group of funds that elected to cut their full holdings by the end of the third quarter. It’s worth mentioning that James Woodson Davis’s Woodson Capital Management cut the biggest stake of the 700 funds monitored by Insider Monkey, comprising an estimated $13.4 million in stock, and Zachary Miller’s Parian Global Management was right behind this move, as the fund dropped about $7.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 1 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Skechers USA Inc (NYSE:SKX) but similarly valued. We will take a look at Primerica, Inc. (NYSE:PRI), Alteryx, Inc. (NYSE:AYX), Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI), and Owens Corning (NYSE:OC). This group of stocks’ market valuations resemble SKX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PRI 12 311623 -4
AYX 31 766712 2
SHI 5 12597 -1
OC 27 932300 -13
Average 18.75 505808 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $506 million. That figure was $320 million in SKX’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) is the least popular one with only 5 bullish hedge fund positions. Skechers USA Inc (NYSE:SKX) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 SKX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SKX were disappointed as the stock returned -16.7% during the same 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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