Dressed for Success

01/13/2006 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

As manager of the exceptional Al Frank Funds, John Buckingham is a firm believer in diversification, and is always hesitant to select a "favorite." But for this annual feature he was willing to choose a retailing stock that he sees as particularly well-dressed for success.

"While we believe in broad portfolio diversification, we think American Eagle Outfitters (AEOS NASDAQ) is an excellent selection for 2006. It’s an all-the-time intense race, vying for the wardrobe dollars of North American teens. And for most retailers, it’s difficult to remain on course all the time. Case in point: In its start to the holiday season, American Eagle badly stumbled out of the gate. Investors were expecting November same-store sales growth of 10.2% but received a mere 1.7% instead. The month started out slowly, with sales of its women’s lines suffering a decline, though week four turned positive. And the company’s online store, AE.com, realized a 39% year-over-year sales increase.

"Still, investors worried that a fault so early in the season suggested a high likelihood of further misses later in the year. Flash forward to early January when American Eagle had been the subject of significant negative press due to a perceived excess amount of discounting at its stores during the holidays. If there was discounting going on, it looks like it worked, and the stock rallied as same store sales for December came in up 9.8% from a year ago, blowing away the estimates for a rise of 2.9%. Total sales rose a very robust 15.5%.

"We never invest on the basis of short-term results and regardless of what the next couple of months may bring, American Eagle remains one of our favorite stocks, regardless of sector. The shares trade for a modest 12 times projected earnings, the balance sheet is in great shape and the dividend yield is in excess of 1%. What’s more, insiders have recently scooped up one million AEOS shares at prices a couple of bucks below the current quotation!"

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