Hedge Funds Are Piling Into American Eagle Outfitters Inc. (AEO)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding American Eagle Outfitters Inc. (NYSE:AEO) and determine whether hedge funds had an edge regarding this stock.

Is American Eagle Outfitters Inc. (NYSE:AEO) a good investment today? The best stock pickers were becoming hopeful. The number of bullish hedge fund bets inched up by 10 in recent months. American Eagle Outfitters Inc. (NYSE:AEO) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 40. Our calculations also showed that AEO isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 26 hedge funds in our database with AEO holdings at the end of March.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s analyze the new hedge fund action encompassing American Eagle Outfitters Inc. (NYSE:AEO).

How are hedge funds trading American Eagle Outfitters Inc. (NYSE:AEO)?

At second quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards AEO over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in American Eagle Outfitters Inc. (NYSE:AEO) was held by Melvin Capital Management, which reported holding $119.9 million worth of stock at the end of September. It was followed by Millennium Management with a $66 million position. Other investors bullish on the company included Samlyn Capital, Point72 Asset Management, and Platinum Asset Management. In terms of the portfolio weights assigned to each position Stormborn Capital Management allocated the biggest weight to American Eagle Outfitters Inc. (NYSE:AEO), around 6.09% of its 13F portfolio. Prentice Capital Management is also relatively very bullish on the stock, designating 4.91 percent of its 13F equity portfolio to AEO.

As industrywide interest jumped, key hedge funds were leading the bulls’ herd. Melvin Capital Management, managed by Gabriel Plotkin, created the most outsized position in American Eagle Outfitters Inc. (NYSE:AEO). Melvin Capital Management had $119.9 million invested in the company at the end of the quarter. Robert Pohly’s Samlyn Capital also made a $58.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Alexander Mitchell’s Scopus Asset Management, Jeff Osher’s No Street Capital, and Louis Bacon’s Moore Global Investments.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as American Eagle Outfitters Inc. (NYSE:AEO) but similarly valued. These stocks are Madison Square Garden Entertainment Corp. (NYSE:MSGE), AtriCure Inc. (NASDAQ:ATRC), Ligand Pharmaceuticals Inc. (NASDAQ:LGND), Federal Signal Corporation (NYSE:FSS), Graham Holdings Co (NYSE:GHC), CommVault Systems, Inc. (NASDAQ:CVLT), and Pebblebrook Hotel Trust (NYSE:PEB). This group of stocks’ market caps are similar to AEO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.7 hedge funds with bullish positions and the average amount invested in these stocks was $256 million. That figure was $519 million in AEO’s case. Madison Square Garden Entertainment Corp. (NYSE:MSGE) is the most popular stock in this table. On the other hand Federal Signal Corporation (NYSE:FSS) is the least popular one with only 12 bullish hedge fund positions. American Eagle Outfitters Inc. (NYSE:AEO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AEO is 83.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on AEO, though not to the same extent, as the stock returned 15.7% since the end of June and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.