At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
What do you do when one of the hottest retail stock pickers on the planet tells you that your stock is on a cold streak -- and destined to lose 20% of its value over the next 12 months? Apparently, you buy the stock anyway.
Or at least, that's how investors seem to be reacting to this week's downgrade of Abercrombie & Fitch
Which raises the question: Why aren't investors more frightened?
Let's go to the tape
The analyst's record may provide one clue. While Brean has made its share of genius picks, historically these have been grouped more in the high-tech arena, far from the workaday world of specialty retail. Brean took early positions in stocks like Western Digital
In contrast, Brean's record in Specialty Retail is as checkered as a Scottish plaid. Over the past three years, we've watched in horror as Brean made fashion faux pas in this industry, racking up a track record of bad accuracy:
Companies |
Brean Says: |
CAPS says: |
Brean's Picks Lagging S&P By: |
---|---|---|---|
Aeropostale |
Outperform |
*** |
21 points (four picks) |
Coldwater Creek |
Outperform |
** |
27 points |
J. Crew |
Outperform |
** |
41 points (five picks) |
And yet, Brean's been on a hot streak of late. Surveying its picks still-active, we find the analyst has improved to roughly 56% accuracy in this sphere, scoring big gains on companies like Urban Outfitters, Guess, and Wet Seal.
Companies |
Brean Says: |
CAPS says: |
Brean's Picks Lagging S&P By: |
---|---|---|---|
Urban Outfitters |
Outperform |
** |
60 points |
Guess? |
Outperform |
** |
54 points |
Wet Seal |
Outperform |
*** |
47 points |
More telling still is the one retailer it's had the most success with so far this year: Abercrombie & Fitch. Twice already in the past 12 months, Brean has called this stock right -- rating Abercrombie an outperformer in April, and an underperformer in October. Combined, the two picks have trounced the market's returns by better than 20 percentage points.
Buy the numbers
And when you look at the valuation on Abercrombie & Fitch today, it's hard to see how Brean could go wrong calling this stock an underperformer again this week. I mean, even if you give A&F the benefit of the doubt, ignore its loss from its now-defunct Ruehl brand, and credit it with the full profit earned from its continuing operations -- this still amounts to just $0.89 per share, and tags this stock with a 41 P/E. That's way, way ahead of the valuations investors are willing to pay for rivals like Buckle
Yet each of these rivals already boasts profit margins far superior to what A&F can claim. The company's promise to increase capital spending in the current year should pressure A&F's net margin even more in 2010. And to top it all, off, if Brean's right about A&F's moves to discount its merchandise to drive traffic, we could see A&F's profit margins fall even farther in the quarters to come.
Foolish takeaway
Its checkered past notwithstanding, Brean Murray is right on the money with this call, Fools. A whopping 41 times earnings is simply too much to pay for a subpar performer like Abercrombie & Fitch. There are better bargains out there. (Click here, and we'll help you find some of them.)