Stock Pick: Steve Madden Ltd. (SHOO) could still be a Wolf of Wall Street

Born in dubious circumstances, the stock is worth a fresh look

Chart showing the trailing 1-year stock performance of Steve Madden Ltd. (SHOO)

Over the weekend I watched the Wolf on Wall Street, a highly entertaining movie about the “investment firm” Stratton Oakmont, which carried out pump and dump schemes and made millions off of its clients in the 1980s and ’90s. There was one part of the movie I found particularly interesting: the firm took Steve Madden Ltd (NASDAQ: SHOO) public.

Like everything the company did, this IPO was set up to make everyone, except the average investor, rich. Steve Madden, the company’s founder and former CEO, was in on this fraud too (see the movie to see how it works) and spent several months in jail.

Immediately after the movie was finished I ran to my computer to see where Steve Madden’s stock trades today and it turns out that the popular women’s shoe company is up nearly 10% over the last 12 months—and a whopping 567% over the last five years. Not bad for a mid-1990s penny stock that got its start under dubious circumstances.

It’s obvious now that investors should have stayed far away from Steve Madden stock when it first listed, but today, a number of analysts have a buy rating on the company.

In January, it reported its Q4 2013 figures and its full year 2013 numbers and while numbers came in below estimates, it still did well. Net sales for the quarter grew by 8.6% year-over-year to $342.6 million, while net sales for the entire year hit $1.3 billion, up 7.1% over 2012.

The stock did fall after the announcement—it’s down 7.8% year-to-date—but Scott Krasik, an analyst BB&T Capital Markets, thinks that drop has presented a buying opportunity. “We believe expectations and sentiment are as low as they have been in several years, which we would use as a rare opportunity to buy shares while trading below its historical multiples,” he wrote in a January 21 report.

He points out that the company’s business model allows it to turn its inventory around about twice as many times as its peers and its strong free cash flow—the company has about $4 of cash per share, he says—could be used  to buy back stocks, which it has done in the past.

The company estimates sales will grow by between 5% and 7% and earnings per share will climb between 4% and 9% in fiscal year 2014. Krasik things that’s doable and it could do even better if it takes advantage of its growth opportunities. Right now, Steve Madden generates less than 10% of its sales from outside the U.S., but its international business is growing by 20% a year.

It should continue expanding in Latin America, Europe and Asia and could buy other businesses that compliment its current lineup of products, says Krasik.

The stock is currently trading at about $34, but Krasik thinks it could hit $39 within the next 12 months. Yes, Steve Madden may have a fraud-filled history, but this company should be a winner going forward.