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Here is What Hedge Funds Think About American Eagle Outfitters Inc. (AEO)

Nina Todic

The market has been volatile in the last 6 months as the Federal Reserve continued its rate hikes and then abruptly reversed its stance and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q4 and the beginning of Q1. In this article, we analyze what the smart money thinks of American Eagle Outfitters Inc. (NYSE:AEO) and find out how it is affected by hedge funds' moves.

American Eagle Outfitters Inc. (NYSE:AEO) was in 25 hedge funds' portfolios at the end of the first quarter of 2019. AEO investors should pay attention to a decrease in hedge fund sentiment in recent months. There were 27 hedge funds in our database with AEO positions at the end of the previous quarter. Our calculations also showed that aeo isn't among the 30 most popular stocks among hedge funds.

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 has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Kerr Neilson

Let's take a peek at the recent hedge fund action surrounding American Eagle Outfitters Inc. (NYSE:AEO).

What have hedge funds been doing with American Eagle Outfitters Inc. (NYSE:AEO)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in AEO a year ago. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

No of Hedge Funds with AEO Positions

Among these funds, AQR Capital Management held the most valuable stake in American Eagle Outfitters Inc. (NYSE:AEO), which was worth $135.3 million at the end of the first quarter. On the second spot was Arrowstreet Capital which amassed $78.6 million worth of shares. Moreover, Renaissance Technologies, Platinum Asset Management, and Royce & Associates were also bullish on American Eagle Outfitters Inc. (NYSE:AEO), allocating a large percentage of their portfolios to this stock.

Seeing as American Eagle Outfitters Inc. (NYSE:AEO) has faced falling interest from the aggregate hedge fund industry, it's safe to say that there exists a select few hedgies that slashed their positions entirely by the end of the third quarter. At the top of the heap, Richard Mashaal's Rima Senvest Management cut the biggest position of the "upper crust" of funds followed by Insider Monkey, valued at an estimated $29.2 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund dropped about $21.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks similar to American Eagle Outfitters Inc. (NYSE:AEO). We will take a look at Wyndham Destinations, Inc. (NYSE:WYND), ACI Worldwide Inc (NASDAQ:ACIW), Air Lease Corp (NYSE:AL), and Olin Corporation (NYSE:OLN). This group of stocks' market valuations resemble AEO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WYND,25,139648,5 ACIW,23,347597,2 AL,23,312641,-10 OLN,28,622842,-5 Average,24.75,355682,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $356 million. That figure was $460 million in AEO's case. Olin Corporation (NYSE:OLN) is the most popular stock in this table. On the other hand ACI Worldwide Inc (NASDAQ:ACIW) is the least popular one with only 23 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately AEO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AEO were disappointed as the stock returned -19.6% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.

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

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