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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
A bear, a bull, and an eagle walk into a bar ...
As funny as I'm sure that joke would be, the upgrade we'll be looking at today is funnier still. On Monday, investment banker Bear Stearns issued a bullish prognosis on American Eagle Outfitters
At first glance, the upgrade to "outperform" looks like a no-brainer. With a trailing price-to-earnings ratio of just 12, and analysts predicting 14% annual profit growth over the next five years, it's hard to argue that AE is anything but undervalued. Yet you can't help marveling at the meandering logical path Bear chooses to travel in making today's upgrade. Says the analyst:
- AE's targeted customers "strongly prefer" branded clothes. (OK.)
- AE offers such clothes at affordable prices. (Granted.)
- The company has few competitors and, in particular, does not compete with department stores or factory stores. (Huh?)
Um, Bear? I was with you through the first couple of points, but you lost me on that last one. "Few competitors"? It's hard to think of an industry with more competition than clothing retail. AE itself lists no fewer than 16 rivals by name, including:
|
CAPS Rating |
P/E |
|
|---|---|---|
|
Abercrombie & Fitch |
*** |
16 |
|
Aeropostale |
*** |
17 |
|
Urban Outfitters |
*** |
32 |
|
The Buckle |
** |
16 |
|
Gap |
** |
21 |
|
Pacific Sunwear |
** |
17 |
Simpler is better
Don't get me wrong -- I think Bear Stearns is a decent analyst, despite its unawareness of the company's competitive landscape. The analyst gets (barely) more of its picks right than wrong, and the margin of victory on its correct calls earns this banker a CAPS rating in the top quintile of investors.
But sometimes, simpler is better. There's no need to go into a lot of detail, and add mistaken details, in order to reach the conclusion that AE is an undervalued retailer. A quick glance at the company's forward P/E ratio of 10, its expected 14% growth rate, and its four-star CAPS rating, proves that the teen retailer is selling at a compelling value.
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