We recently published a list of 10 Deep Value Stocks to Buy Now. In this article, we are going to take a look at where American Eagle Outfitters Inc. (NYSE:AEO) stands against other deep value stocks to buy now.
Deep value investing is a more extreme form of value investing, focusing on stocks that are not just undervalued but significantly mispriced relative to their intrinsic worth. As a contrarian strategy, it seeks companies trading at substantial discounts, often due to temporary setbacks or market inefficiencies. Considered a subset of value investing, deep value investing was pioneered by Benjamin Graham and later refined by Warren Buffett. It targets stocks with extremely low valuations, such as low price-to-earnings (P/E) multiples, low price-to-book (P/B) ratios, and sometimes distressed financial conditions. Given the current macroeconomic landscape—characterized by rising interest rates, inflationary pressures, and increased market volatility—deep value investing has gained renewed relevance as investors search for overlooked opportunities in an increasingly expensive market.
Warren Buffett’s famous mantra, “Be fearful when others are greedy, and greedy when others are fearful,” perfectly encapsulates the essence of deep value investing. This strategy thrives on market inefficiencies, focusing on companies that may be experiencing temporary setbacks due to economic cycles, regulatory challenges, or investor sentiment but have strong potential for long-term recovery. Investors seek businesses with solid fundamentals, strategic shifts, or macroeconomic tailwinds that could serve as catalysts for revaluation.
The Case for Deep Value Investing Today
In a mid-2024 article, GMO LLC’s Asset Allocation Team reaffirmed their conviction in deep value investing, highlighting it as their top long-only investment idea. Rather than relying on traditional labels of “growth” or “value,” they define deep value stocks as those trading significantly below their fundamental worth. While low valuation multiples such as P/E ratios can be indicative of undervaluation, GMO emphasizes that not all low P/E stocks are true bargains—some may be structurally weak—while certain high P/E stocks may still justify their premiums.
GMO’s deep value strategy focuses on the cheapest 20% of stocks relative to intrinsic value, carefully filtering out cyclical traps and low-quality businesses. Their research suggests that in an environment where investor optimism has propelled many stocks to record highs, numerous overlooked deep value opportunities remain. Despite requiring patience, these undervalued stocks present strong potential for absolute and relative returns.
Portfolio managers at the Heartland Mid Cap Value Fund recently cautioned against investing in speculative stocks with inflated valuations, arguing that current market trends of extreme valuation growth and diminished risk aversion are unsustainable. Despite short-term underperformance, they remained confident that disciplined value investing would deliver superior long-term returns.
In today’s relatively expensive market, deep value stocks stand out as attractive opportunities amid widespread over-valuation. Many fundamentally strong businesses have been unfairly punished due to temporary headwinds, making them attractive investments for long-term value seekers. However, deep value investing is not without its challenges—investors must exercise patience and conduct thorough due diligence to distinguish between genuine value opportunities and structurally declining companies.
For those willing to navigate short-term volatility in pursuit of long-term gains, deep value investing offers a promising path.
Our Methodology
To identify the 10 deep value stocks to buy now, we started by screening U.S.-listed companies with a market capitalization over $2 billion. We then applied three key deep-value criteria: a forward price-to-earnings (P/E) ratio of 10 or lower; return on equity of at least 10%; and a dividend yield of at least 1%. Of the shortlisted stocks, we then ranked the top 10 stocks based on their forward P/E ratio, placing those with the lowest P/E at the top. Additionally, we also included data on hedge fund holdings in these companies as of Q4 2024 to provide further insight into investor interest.
Note: All pricing data is as of market close on March 10.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A close-up of a customer trying on a stylish Aerie item, smiling with satisfaction.
American Eagle Outfitters Inc. (NYSE:AEO)
Fwd. P/E: 6.9
Dividend Yield: 3.9%
Number of Hedge Fund Holders: 33
American Eagle Outfitters Inc. (NYSE:AEO) is a specialty retailer offering casual apparel, accessories, and personal care products, primarily catering to young consumers through its American Eagle and Aerie brands. The company operates its own stores, ships to approximately 80 countries via its websites, and licenses its merchandise in international markets.
On January 13, American Eagle Outfitters Inc. (NYSE:AEO) announced that comparable sales for the fourth quarter-to-date (as of January 4) had grown in the low single digits, surpassing its earlier guidance of a 1% increase. Both the American Eagle and Aerie brands saw continued sales momentum. As a result, the company raised its fourth-quarter outlook, now projecting an operating profit of approximately $135 million, an improvement from its prior estimate of $125 million to $130 million. This revision reflects a 2% increase in comparable sales, building on the 8% growth achieved in the previous year. However, despite the positive outlook adjustment, the company had previously indicated that total revenue is expected to decline by approximately 5% due to an unfavorable retail calendar impact. In total, the company has returned $231 million to shareholders year-to-date through a combination of dividends and share repurchases. It has a dividend yield of nearly 4%.
American Eagle Outfitters Inc. (NYSE:AEO) continues to strengthen its market position through its dual-brand strategy, capitalizing on the success of both American Eagle and Aerie. Its focus on digital expansion and omnichannel retailing has enhanced customer engagement and driven sales growth. Additionally, supply chain optimization and inventory management initiatives are contributing to improved margins and overall profitability.
Overall, AEO ranks 7th on our list of deep value stocks to buy now. While we acknowledge the potential of AEO to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires
Disclosure: None. This article is originally published at Insider Monkey.