This Mega-Hedge Fund Manager Is Short Sketchers

Rev. Emmanuel Lemelson was recently a guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick. 

Hedge Fund Manager and Lemelson Capital Management Chief Investment Officer Rev. Emmanuel Lemelson said the firm is short Sketchers USA Inc (NYSE: SKX) on Benzinga's #PreMarket Prep.

Lemelson said that the position "seems counterintuitive" given Sketchers recent run, but that the firm's valuation reflects a "premium value" for a secondary shoe player. There are "limits on all valuations," Lemelson said.

Lemelson said that when the stock was trading between $12 and $17 in 2011 and 2012, he was bullish and thought the company was worth $40 to $60 per share. Since then, the stock has gained more than five-fold to nearly $110 per share.

Despite saying that Sketchers is a "great company" with the "ability to sense trends" and "extraordinary distribution and logistics operations," it is just a "marketing machine."

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Translation: the company is not innovating like its competitor, Nike Inc (NYSE: NKE).

Again comparing the company to Nike, Lemelson said that the return on equity at Nike is nearly double what it is at Sketchers. Sketchers is just "not developing a better mousetrap," Lemelson added.

He said that the current revenue growth might continue for two or three more quarters, but that it is ultimately unsustainable. That's when Lemelson suggested there would be a "steep decline in value."

On a sales and discounted cash flow basis, Lemelson says that the stock is worth $40 to $50 per share, "maybe $60."

Shares of the company closed Friday at $109.76.