I don't normally pay too much attention to analysts' calls on stocks, but every once in a while you come across one that's so wrong-headed that you need to point it out and give it the hands-on-the-cheeks, Moe Szyslak "Whaaa?" And when a hare-brained call is followed up by another, a few months later, that shows just how silly call No. 1 was, it's time for a double dose of duh. Especially when it provides a good lesson.
Let's take a look, then, at what our friends at FTN Midwest said about American Eagle Outfitters (NASDAQ:AEOS) back in October, when they downgraded the stock to "sell." They said that the firm was going to suffer from "peak earnings" problems due to difficult sales and related margin problems. Consumer spending, they believed, might slow. The opinion was exacerbated by FTN's well-known InnovoGroup (NASDAQ:INNO) call. When that denim supplier lowered its guidance, FTN made an overly clever extrapolation and assumed it meant bad things for American Eagle as well.
That's a little like calling the top on Target (NYSE:TGT) because you find out that Standard Toilet Brush and Jelly Sandal (Ticker: EEEW) is reducing shipments and lowering guidance. We're talking about suppliers here. Maybe shoppers are all moving to disposable toilets? Or maybe espadrilles are the thing this spring? Or perhaps STBJS is a bit of a mess (like Innovo Group)?
Getting back to American Eagle; fast-forward half a year. Now FTN is raising estimates because, it says, things aren't so bad; the company is performing well against tough comps comparisons and managing inventory nicely. Although the stock has already run from the $20 price target back then to nearly $30 today, there may be some upside, at least enough to warrant a stunning upgrade to "neutral."
While I happen to agree with the idea that there's more upside for American Eagle shares, let's look at the obvious here. People who listened to this and didn't buy at $20 missed a chance for a quick 50% gain. I'm glad I wasn't one of them, and I'm glad that those who took my advice on American Eagle from our Stocks 2006 report didn't miss out, either.
The point isn't (in my best Tarzan voice) "Me right, them wrong." The point is that in this case, we had one of those prime examples of people trying to make predictions about stuff they can't possibly know. Sales a couple months out? Consumer spending? Good luck.
You can never be sure what the next few months will look like. What you can do is take a look at a business's track record of accomplishment (or failure), make conservative assumptions about what kind of money it will throw off in the future, and come up with a price below which it is worth a buy. For me and many others -- including American Eagle's chairman -- the $20 range was a complete no-brainer.
And keep in mind, Fool, that this happens all the time. Analysts pile on the pain when things go wrong in the short term, especially in retail. It's happened multiple times with Abercrombie & Fitch (NYSE:ANF).
This even happens with large conglomerates that offer few real surprises. Has anything really changed at 3M (NYSE:MMM) from when it was trading for $72 a share a few months back until now? Or Colgate-Palmolive (NYSE:CL) when it was periodically crushed over the last couple of years? Not much, except that too often, the upgrades came after the best buy-in prices were already gone.
In the end, we should be thankful for shortsighted analysts' calls. If they provide us with a chance to get our shares on the cheap, I say bring them on. The key is trusting your own knowledge, keeping your eyes on what matters, and ignoring the short-term static. Your portfolio will thank you.
3M and Colgate-Palmolive are Motley Fool Inside Value recommendations. If you'd like to learn how to pick 'em up while they're still cheap, and the Street is still befuddled, a free trial is a click away.
Seth Jayson is looking for his next retail bargain. At the time of publication, he had shares of 3M and American Eagle Outfitters, but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
