Merion Road Capital Management, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. Merion Road Capital’s long-only large-cap portfolio fell 2.7%, while its long-short small-cap portfolio was up 0.7% for the third quarter of 2021, compared to its Russell 2000, Barclay Hedge Fund, and S&P 500 benchmarks that delivered a 4.3%, 0.1%, and 0.6% returns respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Merion Road Capital Management, in its Q3 2021 investor letter, mentioned Rocky Brands, Inc. (NASDAQ: RCKY) and discussed its stance on the firm. Rocky Brands, Inc. is a Nelsonville, Ohio-based footwear manufacturing company with a $385.9 million market capitalization. RCKY delivered an 88.64% return since the beginning of the year, while its 12-month returns are up by 109.62%. The stock closed at $52.95 per share on October 21, 2021.
Here is what Merion Road Capital Management has to say about Rocky Brands, Inc. in its Q3 2021 investor letter:
“I’ve become increasingly more positive on our largest position, Rocky Brands (“RCKY”). As a reminder, RCKY recently doubled the company with their acquisition of Honeywell’s outdoor boots business. From a big picture, it would make sense for there to be room for operating improvement as Honeywell, a $150bn conglomerate generating $35bn in annual sales, sold off non-core operations generating just $200mm in revenue. Digging in, while the acquisition has strong consumer brands, it appears that their former owners left a lot on the table.
RCKY is in the process of bringing the new business units over onto their ERP which is specifically designed for footwear – previously, the Honeywell brands would have to manually enter product specific information such as sizes and width. Furthermore, the prior owner did not provide the brands with software to predict demand, which meant that they were left to make manual forecasts by SKU. As you can imagine, this was operationally inefficient and most likely resulted in less accurate results. Along a similar vein, the prior owner ran inventory too lean, which left the brands unable to meet retail demand in a timely manner. E-commerce, the clear future of retail, was almost an afterthought. Operations were outsourced and designated “online” inventory was physically separated from inventory to be shipped to bricks and mortar. What this meant was that an online good could appear as sold out,
even if there was plenty of stock on the other side of the warehouse. These anecdotes indicate that improved blocking and tackling should lead to both margin improvement and sales acceleration.”
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Based on our calculations, Rocky Brands, Inc. (NASDAQ: RCKY) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. RCKY was in 15 hedge fund portfolios at the end of the first half of 2021, compared to 11 funds in the previous quarter. Rocky Brands, Inc. (NASDAQ: RCKY) delivered a 2.76% return in the past 3 months.
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 115 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.
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Disclosure: None. This article is originally published at Insider Monkey.
