Is AEO A Good Stock To Buy Now?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards American Eagle Outfitters Inc. (NYSE:AEO).

Is AEO a good stock to buy now? American Eagle Outfitters Inc. (NYSE:AEO) has experienced an increase in hedge fund sentiment recently. American Eagle Outfitters Inc. (NYSE:AEO) was in 42 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 40. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 36 hedge funds in our database with AEO holdings at the end of June. Our calculations also showed that AEO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

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

To the average investor there are many metrics stock traders employ to value stocks. A couple of the less known metrics are hedge fund and insider trading activity. We have shown that, historically, those who follow the best picks of the top money managers can outperform the broader indices by a superb amount (see the details here).


Philippe Laffont of Coatue Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this cannabis tech stock right now. We go through lists like the 15 best blue chip stocks to buy 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we’re going to check out the recent hedge fund action regarding American Eagle Outfitters Inc. (NYSE:AEO).

Do Hedge Funds Think AEO Is A Good Stock To Buy Now?

At third quarter’s end, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in AEO over the last 21 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

More specifically, Melvin Capital Management was the largest shareholder of American Eagle Outfitters Inc. (NYSE:AEO), with a stake worth $177.7 million reported as of the end of September. Trailing Melvin Capital Management was Atreides Management, which amassed a stake valued at $101.7 million. Samlyn Capital, Scopus Asset Management, and Coatue Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Atreides Management allocated the biggest weight to American Eagle Outfitters Inc. (NYSE:AEO), around 9.62% of its 13F portfolio. MIK Capital is also relatively very bullish on the stock, designating 7.57 percent of its 13F equity portfolio to AEO.

As aggregate interest increased, key money managers were leading the bulls’ herd. Atreides Management, managed by Gavin Baker, assembled the biggest position in American Eagle Outfitters Inc. (NYSE:AEO). Atreides Management had $101.7 million invested in the company at the end of the quarter. Philippe Laffont’s Coatue Management also made a $55.9 million investment in the stock during the quarter. The following funds were also among the new AEO investors: Jonathan Soros’s JS Capital, Joe DiMenna’s ZWEIG DIMENNA PARTNERS, and Kamyar Khajavi’s MIK Capital.

Let’s now review hedge fund activity in other stocks similar to American Eagle Outfitters Inc. (NYSE:AEO). These stocks are NorthWestern Corporation (NYSE:NWE), Bloom Energy Corporation (NYSE:BE), Uniti Group Inc. (NASDAQ:UNIT), Itron, Inc. (NASDAQ:ITRI), Sensient Technologies Corporation (NYSE:SXT), ABM Industries, Inc. (NYSE:ABM), and CarGurus, Inc. (NASDAQ:CARG). This group of stocks’ market valuations are similar to AEO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NWE 20 101486 -2
BE 17 176049 1
UNIT 22 351956 5
ITRI 15 276452 2
SXT 22 219122 -1
ABM 18 48485 -3
CARG 32 328264 1
Average 20.9 214545 0.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.9 hedge funds with bullish positions and the average amount invested in these stocks was $215 million. That figure was $764 million in AEO’s case. CarGurus, Inc. (NASDAQ:CARG) is the most popular stock in this table. On the other hand Itron, Inc. (NASDAQ:ITRI) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks American Eagle Outfitters Inc. (NYSE:AEO) is more popular among hedge funds. Our overall hedge fund sentiment score for AEO is 90. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 32.9% in 2020 through December 8th but still managed to beat the market by 16.2 percentage points. Hedge funds were also right about betting on AEO as the stock returned 31.7% since the end of September (through 12/8) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Follow American Eagle Outfitters Inc (NYSE:AEO)

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