Was The Smart Money Right About American Eagle Outfitters Inc. (AEO)?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of American Eagle Outfitters Inc. (NYSE:AEO).

American Eagle Outfitters Inc. (NYSE:AEO) has seen an increase in hedge fund interest recently. American Eagle Outfitters Inc. (NYSE:AEO) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. 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).

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.

Robert Pohly of Samlyn Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. 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. 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 to get excerpts of these letters in your inbox. Keeping this in mind let’s take a gander at the latest hedge fund action encompassing American Eagle Outfitters Inc. (NYSE:AEO).

How have hedgies been trading American Eagle Outfitters Inc. (NYSE:AEO)?

At second quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 38% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in AEO a year ago. So, let’s review 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 June. 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, setting aside 4.91 percent of its 13F equity portfolio to AEO.

Consequently, key hedge funds have been driving this bullishness. Melvin Capital Management, managed by Gabriel Plotkin, initiated 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 initiated a $58.1 million position during the quarter. The other funds with brand new AEO positions 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 similar to American Eagle Outfitters Inc. (NYSE:AEO). We will take a look at 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 closest to AEO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MSGE 38 404860 38
ATRC 23 270054 3
LGND 22 266817 -5
FSS 12 39674 -3
GHC 22 278796 1
CVLT 22 396917 4
PEB 13 137590 3
Average 21.7 256387 5.9

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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on AEO as the stock returned 25.8% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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