The Smart Money Says to Buy American Eagle Outfitters

Is American Eagle Outfitters (NYSE: AEO  ) headed higher, or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.

Of course, not all buys are equal. According to two decades worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence from Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

How do American Eagle Outfitters' managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Insider Rating

Bullish

Far more purchases than sales, some at levels well above what the stock trades for today.

Business Description One of the leading retailers of apparel and accessories for millennial consumers.
Recent Price $16.90
CAPS Stars (Out of 5) ****
Percentage of Shares Owned by Insiders 7.42%
Net Buying (Selling)* $8.5 million
Last Buyer (% Increase)

Michael Jesselson, Director

10,000 shares at $14.32 apiece on Sept. 22, 2010

(Increased direct holdings by 21%.)

Last Seller (% Decrease)

Gerald Wedren, Director

3,000 shares at $18.16 apiece on March 11, 2010

(Reduced direct holdings by 19%.)

Competitors

Coach (NYSE: COH  )

Fossil (Nasdaq: FOSL  )

Quiksilver (NYSE: ZQK  )

Sources: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Nov. 27.) 
*Open market sales and purchases only.

What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bullish
Black Friday has come and gone, and the preliminary reports are encouraging. The National Retail Federation says 8.7% more shoppers visited stores and websites this year than last, 212 million in all. Average spending per shopper increased 6.4%. American Eagle Outfitters should see a share of those gains.

But does it need the boost? Not as much as it did. Capital IQ shows the retailer is once more enjoying revenue growth after taking a beating during the recession. Returns on capital are also in the double digits and rising.

Meanwhile, American Eagle Outfitters' dividend yields a healthy 2.6%. It's worth noting that management refused to reduce its payout during the recession, even though the company failed to produce enough free cash flow to fully cover 2008's dividend.

Today, American Eagle's fortunes are improving. Cash flow is paying for the dividend, and the company has made $210 million in share repurchases over the trailing 12 months.

Executives and board members are also buying, but for themselves. Director Michael Jesselson purchased 10,000 shares at levels not far below where the stock trades for today. And the last big seller, Gerald Wedren, sold at a premium to current prices. In both cases, insiders appear to have acted on the presumption of value gained. So far, they've been proven right. I expect they'll continue to be.

Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate Motorola. You can also add the stock to your watchlist.

And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here, reply to me on Twitter, or use the comments box below. I'll write this column as often as you, our readers, demand.

Coach is a Motley Fool Stock Advisor selection. Fossil is a Motley Fool Hidden Gems pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Coach and is also on Twitter as @TheMotleyFool. Its disclosure policy has its eye on you.


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