Why are Hedge Funds Buying this Footwear Company?
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In the financial world, there are many strategies that individual investors can use to analyze their portfolios, though one indicator that is often overlooked is hedge fund sentiment. In almost every case, it’s important to take a look at how the world’s most successful money managers are behaving; it may even help you turn a profit. Empirical studies have shown that fund managers’ top stock picks can beat the market by 7% a year, while our research can give you the tools to generate an excess return of up to 20% annually.
One stock that hedge fund managers have been particularly bullish about in recent months is Skechers USA (NYSE: SKX). Since the start of 2012, shares of the casual footwear company have generated a return of 73.5%, beating the footwear and accessories industry (7.2%) quite handily. Over this same time, hedge fund interest in the stock has been increasing by an equally impressive rate.
At the end of June, 16 fund managers held long positions in Skechers, compared to 10 at the end of 2011. According to the industry’s 13F filings with the SEC, the most bullish hedge fund over this timeframe was Kian Ghazi’s Hawkshaw Capital Management, which initiated a $10.2 billion position in the company. Other prominent money managers that currently hold shares of Skechers are Steven Cohen, Jim Simons, and Cliff Asness. Cohen’s SAC Capital Advisors doubled-down on Skechers over the last quarter and then some, increasing its holdings by 155%.
Looking at the company’s financials, it isn’t a world-beater by any means, sporting top line growth below industry averages. Specifically, Skechers has generated a 3-year average revenue growth of 3.8% since 2009, below peers like NIKE (NYSE: NKE) at 8.0%, Crocs (NASDAQ: CROX) at 11.5%, Steven Madden (NASDAQ: SHOO) at 29.3%, and Adidas (PINK:ADDYY) at 7.3%. In its most recent earnings release, however, Skechers was able to beat the Street’s revenue forecast by 3.0%, reporting a Q2 total of $384.0 million. Moreover, the company also impressed on the earnings front, as it beat EPS estimates by 7 cents, with -$0.04 a share.
Skechers did disappoint investors in 2011, reporting a loss of $67 million, or -$1.39 a share, but better days seem to be on the horizon. By the end of 2012, analysts are expecting that the company will finish the year with an EPS of 9 cents a share, with an upper bound of 24 cents a share. These forecasts expand quite significantly in 2013 to 84 cents a share, with a high estimate of $1.07 a share.
From a valuation standpoint, Skechers stock trades at deeply discounted Price-to-Book (1.2X) and Price-to-Sales (0.7X) ratios, which are an average of 60% below industry averages. Interestingly, the company also sports a Price-to-Cash Flow ratio (6.7X) below Nike (24.8X), Crocs (11.1X), Steven Madden (20.3X), and Adidas (12.7X), despite the fact that its operating (33.0%) and free (34.7%) cash flows have grown quite nicely post-recession. In fact, over the past decade, Skechers’ cash hoard has traditionally traded at a 13% discount to the S&P 500. This year, it is cheaper, trading at a 26% discount.
To recap: Skechers (NYSE: SKX) has seen its share price improve dramatically since the start of 2012, as has the hedge fund sentiment surrounding the stock. Despite the fact that the company has had its growth-related troubles in the past, analysts are expecting a turnaround, most notably by the end of 2013. Since we can see that the stock is trading at a relatively deep discount in comparison to its competitors, there is a moderate value-play here.
This article is written by Jake Mann and edited by Meena Krishnamsetty. They don' t own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Crocs and SKECHERS USA. Motley Fool newsletter services recommend Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.