Were Hedge Funds Right About Crowding Into Deckers Outdoor Corp (DECK)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Deckers Outdoor Corp (NYSE:DECK).

Deckers Outdoor Corp (NYSE:DECK) shareholders have witnessed an increase in hedge fund sentiment recently. Deckers Outdoor Corp (NYSE:DECK) was in 47 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 43. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 31 hedge funds in our database with DECK positions at the end of the first quarter. Our calculations also showed that DECK 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.

Ken Heebner of Capital Growth Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth 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. With all of this in mind let’s take a gander at the recent hedge fund action encompassing Deckers Outdoor Corp (NYSE:DECK).

What have hedge funds been doing with Deckers Outdoor Corp (NYSE:DECK)?

Heading into the third quarter of 2020, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of 52% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DECK over the last 20 quarters. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Gabriel Plotkin’s Melvin Capital Management has the largest position in Deckers Outdoor Corp (NYSE:DECK), worth close to $142.4 million, accounting for 0.8% of its total 13F portfolio. The second largest stake is held by Steadfast Capital Management, managed by Robert Pitts, which holds a $104.2 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism comprise Cliff Asness’s AQR Capital Management, Renaissance Technologies and James Woodson Davis’s Woodson Capital Management. In terms of the portfolio weights assigned to each position Miura Global Management allocated the biggest weight to Deckers Outdoor Corp (NYSE:DECK), around 7.78% of its 13F portfolio. Woodson Capital Management is also relatively very bullish on the stock, designating 5.29 percent of its 13F equity portfolio to DECK.

Consequently, key hedge funds have jumped into Deckers Outdoor Corp (NYSE:DECK) headfirst. Steadfast Capital Management, managed by Robert Pitts, created the most valuable position in Deckers Outdoor Corp (NYSE:DECK). Steadfast Capital Management had $104.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $20 million investment in the stock during the quarter. The other funds with new positions in the stock are Ken Heebner’s Capital Growth Management, Angela Aldrich’s Bayberry Capital Partners, and David Ma’s Composite Capital.

Let’s now take a look at hedge fund activity in other stocks similar to Deckers Outdoor Corp (NYSE:DECK). We will take a look at Steel Dynamics, Inc. (NASDAQ:STLD), CACI International Inc (NYSE:CACI), Pearson PLC (NYSE:PSO), Arrow Electronics, Inc. (NYSE:ARW), Quanta Services Inc (NYSE:PWR), BWX Technologies Inc (NYSE:BWXT), and Reinsurance Group of America Inc (NYSE:RGA). This group of stocks’ market valuations resemble DECK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STLD 30 370392 3
CACI 34 395916 9
PSO 7 14870 -1
ARW 29 531930 6
PWR 31 624315 3
BWXT 27 141453 3
RGA 33 240555 3
Average 27.3 331347 3.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.3 hedge funds with bullish positions and the average amount invested in these stocks was $331 million. That figure was $858 million in DECK’s case. CACI International Inc (NYSE:CACI) is the most popular stock in this table. On the other hand Pearson PLC (NYSE:PSO) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Deckers Outdoor Corp (NYSE:DECK) is more popular among hedge funds. Our overall hedge fund sentiment score for DECK is 90. 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 returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on DECK as the stock returned 30% since the end of June (through 10/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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Disclosure: None. This article was originally published at Insider Monkey.