Should You Avoid American Eagle Outfitters (AEO)?

The worries about the election and the ongoing uncertainty about the path of interest-rate increases have been keeping investors on the sidelines. Of course, most hedge funds and other asset managers have been underperforming main stock market indices since the middle of 2015. Interestingly though, smaller-cap stocks registered their best performance relative to the large-capitalization stocks since the end of the June quarter, suggesting that this may be the best time to take a cue from their stock picks. In fact, the Russell 2000 Index gained more than 15% since the beginning of the third quarter, while the Standard and Poor’s 500 benchmark returned less than 6%. This article will lay out and discuss the hedge fund and institutional investor sentiment towards American Eagle Outfitters (NYSE:AEO).

American Eagle Outfitters (NYSE:AEO) investors should be aware of a decrease in enthusiasm from smart money recently. At the end of this article we will also compare AEO to other stocks including ITT Corp (NYSE:ITT), PS Business Parks Inc (NYSE:PSB), and Brookdale Senior Living, Inc. (NYSE:BKD) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Keeping this in mind, let’s take a gander at the fresh action regarding American Eagle Outfitters (NYSE:AEO).

Hedge fund activity in American Eagle Outfitters (NYSE:AEO)

At Q3’s end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a decline of 16% from the previous quarter. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the largest position in American Eagle Outfitters (NYSE:AEO). According to regulatory filings, the fund has a $66.9 million position in the stock, comprising 0.4% of its 13F portfolio. On Royce & Associates’s heels is Cliff Asness of AQR Capital Management, with a $62.8 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions include John Overdeck and David Siegel’s Two Sigma Advisors, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Ken Griffin’s Citadel Investment Group.

Judging by the fact that American Eagle Outfitters (NYSE:AEO) has witnessed a decline in interest from the smart money, it’s easy to see that there lies a certain “tier” of fund managers that elected to cut their entire stakes heading into Q4. Intriguingly, Ken Grossman and Glen Schneider’s SG Capital Management sold off the biggest stake of the 700 funds monitored by Insider Monkey, comprising close to $22.2 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund cut about $17.9 million worth of AEO shares. These moves are interesting, as aggregate hedge fund interest fell by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to American Eagle Outfitters (NYSE:AEO). These stocks are ITT Corp (NYSE:ITT), PS Business Parks Inc (NYSE:PSB), Brookdale Senior Living, Inc. (NYSE:BKD), and Cantel Medical Corp. (NYSE:CMN). This group of stocks’ market values are similar to AEO’s market value.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $352 million. That figure was $274 million in AEO’s case. Brookdale Senior Living, Inc. (NYSE:BKD) is the most popular stock in this table. On the other hand PS Business Parks Inc (NYSE:PSB) is the least popular one with only 7 bullish hedge fund positions. American Eagle Outfitters (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. In this regard BKD might be a better candidate to consider a long position.

Disclosure: none.