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Did Hedge Funds Make The Right Call On American Eagle Outfitters Inc. (AEO) ?

Abigail Fisher

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtAmerican Eagle Outfitters Inc. (NYSE:AEO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is American Eagle Outfitters Inc. (NYSE:AEO) worth your attention right now? Money managers were buying. The number of long hedge fund positions advanced by 2 in recent months. Our calculations also showed that AEO isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_339612" align="aligncenter" width="392"] Kerr Neilson of Platinum Asset Management[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind we're going to analyze the key hedge fund action encompassing American Eagle Outfitters Inc. (NYSE:AEO).

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

Heading into the second quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AEO over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Platinum Asset Management was the largest shareholder of American Eagle Outfitters Inc. (NYSE:AEO), with a stake worth $28 million reported as of the end of September. Trailing Platinum Asset Management was Renaissance Technologies, which amassed a stake valued at $21.1 million. AQR Capital Management, Arrowstreet Capital, and Royce & Associates 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 DC Capital Partners allocated the biggest weight to American Eagle Outfitters Inc. (NYSE:AEO), around 26.49% of its 13F portfolio. Prentice Capital Management is also relatively very bullish on the stock, dishing out 4.71 percent of its 13F equity portfolio to AEO.

As industrywide interest jumped, key money managers were breaking ground themselves. Prentice Capital Management, managed by Michael Zimmerman, initiated the largest position in American Eagle Outfitters Inc. (NYSE:AEO). Prentice Capital Management had $9.9 million invested in the company at the end of the quarter. Andrew Kurita's Kettle Hill Capital Management also made a $5.1 million investment in the stock during the quarter. The other funds with brand new AEO positions are Steve Cohen's Point72 Asset Management, John Overdeck and David Siegel's Two Sigma Advisors, and C. Jonathan Gattman's Cloverdale Capital Management.

Let's check out hedge fund activity in other stocks similar to American Eagle Outfitters Inc. (NYSE:AEO). These stocks are Corecivic Inc. (NYSE:CXW), Main Street Capital Corporation (NYSE:MAIN), Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (NASDAQ:OMAB), and Matson Inc. (NYSE:MATX). This group of stocks' market valuations are closest to AEO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CXW,18,109733,-7 MAIN,7,14571,-2 OMAB,4,29890,-2 MATX,3,6188,-7 Average,8,40096,-4.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $40 million. That figure was $133 million in AEO's case. Corecivic Inc. (NYSE:CXW) is the most popular stock in this table. On the other hand Matson Inc. (NYSE:MATX) is the least popular one with only 3 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 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on AEO as the stock returned 39.5% in Q2 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.

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

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