Were Bearish Hedge Funds Wrong About Apparel Maker Abercrombie & Fitch Co. (ANF)?

The once-dominant teen apparel maker Abercrombie & Fitch Co. (NYSE:ANF) just released its financial results for the second quarter of fiscal 2015, ended August 1, reporting that it lost $810,000, or $0.01 per share. The company posted a net profit of $12.70 million, or $0.17 per share, in the same quarter last year. Revenue for the quarter fell by 8.17% compared to the same quarter a year earlier, to $817.80 million. Despite the year-over-year declines, the company’s results for the quarter were better-than-expected, an achievement attributed to the demand for its Hollister and Abercrombie Kids brands. Thomson Reuters’ analysts had expected Abercrombie & Fitch Co. to post revenue of $811.5 million for the period. The results have sent shares soaring by more than 12% in morning trading today, though they remain down by nearly 33% year-to-date.


While we look at a stock’s performance in the stock market, we also consider hedge fund activity relating to stocks, as the smart money invests heavily in analytical research before making any investment decisions. In the case of Abercrombie & Fitch Co. (NYSE:ANF), the number of hedge funds holding long positions dropped to 19 at the close of the second quarter from 24 at the beginning of the period. The aggregate investment of those funds with holdings was also down significantly, falling by 39.34% to $137.96 million, while shares were down only marginally in the second quarter, indicating a lot of selling of shares by some of the best money managers in the world. Despite the gains today, we can say that the smart money has not actually been wrong on the stock, as it’s still down by nearly 10% in the third quarter.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 35 months and outperformed the S&P 500 Index by over 60 percentage points (see the details here).

Another important parameter used by Insider Monkey in analyzing the general sentiment towards a given stock is insider trading. There were three open market buys and one sale of shares of Abercrombie & Fitch Co. (NYSE:ANF) over the past three months, which indicates very bullish insider sentiment. Director Craig Stapleton, for example, made an insider buy of 10,000 shares at an average price of $22.42 in a transaction on June 22.

Out of the more than 700 hedge funds tracked by Insider Monkey, SG Capital Management, managed by Ken Grossman and Glen Schneider, opened a new position in the stock, closing the second quarter with 847,131 shares with a market value of $18.22 million. Billionaire David Harding’s Winton Capital Management was also long in the stock at the end of the second quarter, with 612,262 shares valued at $13.17 million, after the fund raised its stake in the stock by 102% during the quarter. Some other noteworthy investors that were long in the stock are Elm Ridge Capital, led by Ron Gutfleish, with 592,469 shares valued at $12.74 million, and billionaire D. E. Shaw’s D E Shaw, with 536,519 shares valued at $11.54 million.

In conclusion, we can say that hedge funds were bearish and rightfully so, as shares have steadily declined. On the other hand, insiders, who are reputed for knowing a lot about the internal affairs and projections of a company, have been optimistic about the stock recently, which suggests that the bottom may have been reached. Taking the company’s recent performance into consideration, and its renewed re-branding strategy, we can say that Abercrombie & Fitch Co. (NYSE:ANF) has good potential and that the stock is a good buy at the moment.

Disclosure: None