Aaron’s, Inc. (NYSE:AAN) reported its second quarter financial results towards the end of the last week. The furniture retailer beat the consensus expectations, as it reported earnings of $0.61 per share for the quarter, exceeding the Street’s expectations by 35%. The Atlanta-based retailer also posted revenue of $769 million, exceeding the Street’s expectations by $4 million. During the same period in 2014, the company reported net earnings of $0.37 per share on revenue of $662.5 million. Aaron’s, Inc. (NYSE:AAN) also raised it fiscal year 2015 guidance for earnings to a range of between $2.15 and $2.35 per share, a range which was previously between $2.01 and $2.21 per share. The Street’s consensus EPS for FY 2015 is $2.15. “Our core business achieved an increase in profit margin due to improved expense and inventory control,” Aaron’s, Inc. (NYSE:AAN) CEO John Robinson was quoted as saying during the conference call. One major concern in the earnings was that Aaron’s core sales and lease ownership revenues dropped by 3.9% year-over-year to $496.7 million and that the HomeSmart division’s revenues plunged by 3.1% year-over-year to $15.5 million. Robinson acknowledged that the core revenues were weaker in the quarter, but that the cost cuts enabled the earnings beat. Aaron’s, Inc. (NYSE:AAN)’s shares gained around 1% in the pre-market on Friday, but soon after, the stock started dropping in value, closing at 6.6% below their closing price on Thursday. Does this recommend a good buying opportunity, or is it buyer beware?
At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in Aaron’s, Inc. (NYSE:AAN) with a total investment of $250.3 million, which was around $327.3 million held by 23 hedge funds at the end of 2014. The stock dropped by about 7.8% during the January – March period, whereas the hedge funds’ holdings in the stock dropped by 23% during the same period. Despite the increasing number of hedge funds with long positions in the stock, overall the hedge funds reduced their investment in the stock greatly, displaying their bearish sentiment towards it.
Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012 when this system went live, returning a cumulative 139.7% vs. 58.7% for the S&P 500 Index (read the details).
Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that can lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. Looking at Aaron’s, Inc. (NYSE:AAN), Directors David Kolb and Kathy Betty purchased 376 shares and 465 shares respectively during the first half of 2015. On the contrary, Senior Group Vice President at Aaron’s, Inc. (NYSE:AAN), James Cates sold around 9,385 shares during the same period.
Keeping this in mind, let’s take a look at the latest hedge fund action encompassing Aaron’s, Inc. (NYSE:AAN).