Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Billionaire Steven Cohen’s Latest Bet

SAC CAPITAL ADVISORSAs of March 31, S.A.C. Capital Advisors owned about 2.25 percent of Aeropostale (ARO). In addition to this premier mall-based clothing retailer, Steven Cohen’s S.A.C. Capital has a very diverse set of holdings in its $22 billion portfolio, including Murphy Oil (MUR), Apple (AAPL) and Sirius XM Radio (SIRI) (You can view the portfolio here). Last week, Steve Cohen revealed that his position in Aeropostale reached 4.1 million shares or a 5.1% stake in the company. Let’s check out insider sentiment in the stock before we try to answer what Steven Cohen sees in Aeropostale.

Insider activity has seemingly come in two bursts in the past year. In February and March 2011, seven different insiders sold shares at around $24 to $26. In late March 2012, four other insiders, including CEO Thomas Johnson, sold shares at about $21 to $22 a share (Click here for more insider data). So insiders over the past year converged on a rough consensus that the low/mid-$20 range was a decent selling price. This gives Cohen’s purchase some traction.

In fact, there are a number of factors suggesting that the upper edge of these insider trades is closer to the true value of Aeropostale shares. Sales for Aeropostale were up 6% year-over-year for the first quarter 2012. Despite this, the company reported earnings of $0.13 per share, down from $0.20 in the second quarter 2011. So the customer base at Aeropostale has been getting healthier along with economic indicators, but this has not translated into increased earnings. Why?

Taking a look at Aeropostale’s 12-month operating margin, we see a dip to around 5 percent in January 2012 from around 16 percent in January 2011. This reflects recent acceleration in production cost inflation. The producer price index (PPI) for the apparel manufacturing subsector reveals an increase in apparel production costs during 2011 after a relatively flat 2009 to 2010 span. Given Aeropostale’s competitive assortment of peers–including The Gap (GPS) and Abercrombie & Fitch (ANF)–and ephemeral fashion culture, Aeropostale needs to justify passing the cost burden to its customers by providing stand-out, trendy products while promoting them effectively.

Luckily, production costs are expected to stabilize, and this is where S.A.C. Capital’s strategy comes in. Accompanied by a drop in overall PPI, Energy prices dropped in May by 4.3 percent, the most since March 2009. Given that Aeropostale shares are presently trading at 22.5 times their lagging earnings, which is between the upper and lower quintile values for consumer discretionary of 12 and 24, respectively, Cohen is likely expecting significant earnings growth due to improved operating margins. Indeed, Aeropostale is presently well positioned in respect to sales relative to its peers. Its price/sales is 0.6, the lowest among American Eagle Outfitters (AEO), The Gap, and Abercrombie & Fitch. The Gap has the highest price/sales of 1.2. So even assuming conservative growth estimates from recent sales levels, Aeropostal stands to realize price appreciation from improved operating margin.

With its recent expansion into Canada and addition to its over 1000 stores, present pricing might make for an attractive entry for Aeropostale. The company is also 5.8% owned by Lee Ainslie’s Maverick Capital, whose diverse set of holdings also include Urban Outfitters (URBN) (see its holdings here). Ainslie previously worked at Julian Robertson’s Tiger Management, emphasizing a straightforward long/short approach, goes long on the “200 best” and goes short on the “200 worst” companies. So the fact that both Ainslie and Cohen are long on Aeropostale is a positive comment on the company’s overall investment quality.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.