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Hedge Funds’ 10 Favorite Apparel Stores

Apparel stores are often well-known consumer stocks. Yet despite their dependence on potentially fleeting consumer sentiment, a number of top investors believe that they can be good investments as well. Here are the 10 most popular apparel store stocks among hedge funds:

Chuck Royce

American Eagle (NYSE:AEO): American Eagle is not even in the top five apparel stores by market capitalization, but it is a hedge fund favorite with 41 hedge funds owning shares at the end of March. American Eagle achieved solid revenue and earnings growth in its first quarter (ending in April), and analyst estimates give it a forward P/E of 14. One fund with a large position in the stock was Chuck Royce’s Royce and Associates, which owned 13.1 million shares (see more stock picks from Royce & Associates).

Abercrombie & Fitch (NYSE:ANF): Abercrombie & Fitch has struggled in the recent past. Over the last year the stock has fallen over 50%, with about half of that loss coming so far in 2012. Yet the 29 hedge funds which had owned shares at the beginning of the year had become 37 three months later, suggesting that top managers increasingly believed the stock had been beaten down by the market. Dan Loeb, at Third Point, was one of the managers who decided to take a position in the stock in the first quarter; the fund bought 1.9 million shares (see other stocks owned by Third Point).

GAP (NYSE:GPS): GPS saw a large increase in hedge fund holders in the first quarter, from 22 to 33. Gap operates stores under Old Navy and Banana Republic as well as its flagship brand. The stock’s considerable interest from hedge funds includes Edward Lampert’s ESL Investments, which bought into the stock heavily in early 2011 and now owns 31 million shares. It is the third largest holding in Lampert’s retail-focused 13F portfolio (ESL is a major shareholder in Sears (SHLD), where Lampert serves as chairman). So far this year GPS is up over 50%.

Foot Locker (NYSE:FL): 27 hedge funds had positions in FL. Among them was Ken Griffin’s Citadel Investment Group, which increased its holdings by a third to 4.5 million shares of the company (research more of Ken Griffin’s favorite stocks). FL is a potential value stock with a trailing P/E ratio of 16 even as the stock price has surged nearly 40% this year on strong earnings- analysts have underestimated the company’s performance each of the last four quarters, often by over 10%.

Collective Brands (NYSE:PSS): A low market cap of just over $1 billion didn’t stop the operator of Payless ShoeSource stores from being hedge funds’ fifth favorite apparel store stock. Owners of the stock have since gotten good news, with the company announcing a buyout from a consortium including Wolverine World Wide (WWW), Blum Strategic Partners, and Golden Gate Capital in May. One likely winner from this acquisition is Magnetar Capital, which owned 1.5 million shares at the end of March.

Ross Stores (NASDAQ:ROST): Ross Stores is one of the largest apparel store companies traded on the public markets. It operates discount stores such as Ross Dress for Less and has a market cap of over $15 billion. Likely attracted by the discount focus, 25 funds reported ownership of the stock. Steve Mandel, a Tiger Cub who runs Lone Pine Capital, decided that the time was right to get into the company in the first quarter and initiated a position of 4 million shares (see more of Mandel’s stock picks). Since the end of March the stock is up over 15%.

Aeropostale (NYSE:ARO): 24 hedge funds owned Aeropostale in their 13F portfolios at the end of March, up from 18 at the beginning of the year. One major hedge fund with an interest in Aeropostale is S.A.C. Capital Advisors, managed by billionaire Steven Cohen (read more about Cohen’s investment and ARO). ARO is up about 30% so far in 2012, so hedge funds who have bought in have likely made a solid profit on their investment.

Charming Shoppes (CHRS): Charming Shoppes, owner of Lane Bryant and Fashion Bug, was owned by 23 funds, and is now out of the public markets after being acquired by Ascena Retail Group (NASDAQ:ASNA). The stock’s popularity among hedge funds may have been partly due to rumors of the merger, as many funds like to invest in the stock of companies being acquired (learn about why hedge funds invest in merger arbitrage).

Finish Line (NASDAQ:FINL): Finish Line focuses on performance apparel, such as running shoes. It trades at very low multiples- a trailing P/E of 14, a forward P/E of 11, and an enterprise value that comes out to 5.2 times trailing EBITDA. So far in 2012 the stock is about even with the S&P 500. David Keidan’s Buckingham Capital Management, which has positions in a number of other retail stocks, added to its position in the first quarter and now owns 1.7 million shares.

Limited Brands (NYSE:LTD): Rounding out the list of top apparel store stocks among hedge funds is Limited Brands, a $14 billion market cap company which is best known for its Victoria’s Secret brand. Murray Stahl’s Horizon Asset Management took a major position in the stock in summer 2011 and now owns 1.7 million shares of the company (see what else Horizon wanted to own). Limited Brands saw both its revenue and its net income fall in its most recent quarter compared to a year ago.

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