Hedge Funds Were Dumping American Eagle Outfitters Inc. (AEO) Before The Coronavirus

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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).

Is American Eagle Outfitters Inc. (NYSE:AEO) a bargain? Investors who are in the know are in a bearish mood. The number of long hedge fund bets fell by 5 lately. Our calculations also showed that AEO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). AEO was in 24 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 29 hedge funds in our database with AEO holdings at the end of the previous quarter.

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 41 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.

Kerr Neilson of Platinum Asset Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the key hedge fund action surrounding American Eagle Outfitters Inc. (NYSE:AEO).

What does smart money think about American Eagle Outfitters Inc. (NYSE:AEO)?

At the end of the fourth quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in AEO over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Is AEO A Good Stock To Buy?

The largest stake in American Eagle Outfitters Inc. (NYSE:AEO) was held by Interval Partners, which reported holding $70.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $56.8 million position. Other investors bullish on the company included Arrowstreet Capital, Platinum Asset Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position DC Capital Partners allocated the biggest weight to American Eagle Outfitters Inc. (NYSE:AEO), around 20.19% of its 13F portfolio. Interval Partners is also relatively very bullish on the stock, setting aside 2.52 percent of its 13F equity portfolio to AEO.

Judging by the fact that American Eagle Outfitters Inc. (NYSE:AEO) has witnessed falling interest from the aggregate hedge fund industry, it’s safe to say that there were a few money managers that elected to cut their entire stakes last quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management dumped the largest stake of the 750 funds watched by Insider Monkey, comprising about $12.2 million in stock. David Keidan’s fund, Buckingham Capital Management, also sold off its stock, about $8.9 million worth. These transactions are important to note, as total hedge fund interest was cut by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to American Eagle Outfitters Inc. (NYSE:AEO). These stocks are Albany International Corp. (NYSE:AIN), Golub Capital BDC Inc (NASDAQ:GBDC), LivePerson, Inc. (NASDAQ:LPSN), and Crescent Point Energy Corp (NYSE:CPG). This group of stocks’ market values match AEO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AIN 19 96389 5
GBDC 16 117101 4
LPSN 23 202344 7
CPG 14 73177 2
Average 18 122253 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $122 million. That figure was $297 million in AEO’s case. LivePerson, Inc. (NASDAQ:LPSN) is the most popular stock in this table. On the other hand Crescent Point Energy Corp (NYSE:CPG) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks American Eagle Outfitters Inc. (NYSE:AEO) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately AEO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AEO were disappointed as the stock returned -41.2% during the first two and a half months of 2020 (through March 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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