Investment opportunities can pop up in unexpected places, but none may be more offbeat than from the small cap stocks in the footwear industry…. such as Deckers Outdoor Corp. (DECK), Iconix Brand Group Inc. (ICON), and Wolverine World Wide Inc. (WWW). Each of those shoe companies - and many of their peers - have fared the recession surprisingly well, leaving many investors wondering why the S&P 600 (small cap) Footwear Index is still down 66% from its October 2007 peak. Here’s a closer look at footwear’s recent past and likely future.

Footwear the First to Fall

Though the recession (thank sto the privilege of back-dating) officially began in December of 2007, it’s not like the market started to fall apart at the same time. Indeed, many industry groups were still hitting new highs in mid-2008. Footwear was not one of them though.

The S&P 1500 footwear index (all caps) began tumbling in early November of 2007, and hasn’t looked back since. All told, the index lost 55% of its value from its peak through its March 2009 trough. The small cap version of the index lost a whopping 82% during the same period. That big dip, however, is part of the opportunity … low stock prices are more affordable than high ones.

‘Undervalued Shoe Stock’ is a Matter of Opinion

Of course, the difference between a ‘cheap’ shoe stock and an ‘undervalued’ one is the company’s future. The more compelling the future, the more attractive the stock is. Fortunately for value seekers, Deckers, Iconix, and Wolverine do indeed have a compelling future… an outlook made very plausible based on the fact that many of these companies remained pretty profitable during a period when profits were rare at best.

Take Iconix for instance…. net margins of more than 30%? Deckers was no slouch over the last twelve months either, clearing more than 10% of its revenue as income. With a forward-looking price multiple of 9.9, DECK is more than a slightly-interesting long-term idea.

The Cinderella story here, however, may be LaCrosse Footwear Inc. (BOOT). To say it’s off the radar would be an understatement, but the company has managed to do something other similarly-sized shoe companies can’t - turn a profit.

Though clearly not every single small cap name in the footwear group is a winner, as a whole, the industry has quietly been holding its own, waiting for an economic rebound. On that note….

Looking Forward - Footwear to Lead the Recovery?

Economic predictions are rarely even worth the paper they’re printed on. And, the estimated earnings for these shoe companies are indeed rooted on the assumption of an economic recovery. So, what if the recovery doesn’t actually happen?

It’s a legitimate concern, but a revisit to 2007 is in order.

In late 2007, when very few prognosticators and even fewer investors actually believed we were headed into the worst recession since World War II, the demise of shoe manufacturer stocks actually correctly predicted what was to come. In that light, the near-100% gain we’ve seen from the S&P 600 Footwear Index since March’s low may be equally indicative of the economy’s improving health.

Strange? A little. Plausible? Sure. Shoe stocks are generally something of an enigma when it comes to long-term trends, so to use them as an economic barometer now isn’t any crazier than, say the Dow Theory (which compares transportation stocks to industrials stocks to determine the market’s true trend).

In the meantime, Iconix and Decker - and Wolverine to a lesser degree - appear to be leading a very stealthy footwear stock charge. Long-term investors who think boring and obscure stocks are beautiful should take note.