Were Hedge Funds Right About Ditching Steven Madden, Ltd. (SHOO)?

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 Steven Madden, Ltd. (NASDAQ:SHOO) and determine whether hedge funds had an edge regarding this stock.

Steven Madden, Ltd. (NASDAQ:SHOO) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that SHOO isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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. 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.

Jim Simons Founder of Renaissance Technologies

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to check out the fresh hedge fund action regarding Steven Madden, Ltd. (NASDAQ:SHOO).

Hedge fund activity in Steven Madden, Ltd. (NASDAQ:SHOO)

Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SHOO over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Steven Madden, Ltd. (NASDAQ:SHOO), which was worth $17.4 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $10.2 million worth of shares. Arrowstreet Capital, Millennium Management, and Gotham Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Steven Madden, Ltd. (NASDAQ:SHOO), around 1.07% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, earmarking 0.54 percent of its 13F equity portfolio to SHOO.

Judging by the fact that Steven Madden, Ltd. (NASDAQ:SHOO) has experienced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of hedgies that elected to cut their positions entirely by the end of the first quarter. At the top of the heap, Donald Sussman’s Paloma Partners cut the biggest investment of the 750 funds watched by Insider Monkey, totaling close to $1.9 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund dropped about $1.6 million worth. These moves are interesting, as total hedge fund interest dropped by 4 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Steven Madden, Ltd. (NASDAQ:SHOO) but similarly valued. We will take a look at Varonis Systems Inc (NASDAQ:VRNS), TFI International Inc. (NYSE:TFII), Outfront Media Inc. (REIT) (NYSE:OUT), and Cornerstone OnDemand, Inc. (NASDAQ:CSOD). This group of stocks’ market valuations resemble SHOO’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $316 million. That figure was $59 million in SHOO’s case. Outfront Media Inc. (REIT) (NYSE:OUT) is the most popular stock in this table. On the other hand TFI International Inc. (NYSE:TFII) is the least popular one with only 12 bullish hedge fund positions. Steven Madden, Ltd. (NASDAQ:SHOO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately SHOO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SHOO investors were disappointed as the stock returned -3.8% since Q1 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.

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