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How Analysts' High Expectations for Abercrombie & Fitch May Have Pulled the Stock Lower

Combining ANF's technical, fundamental, and sentiment backdrops to break down its latest dip

by 6/12/2012 12:38:37 PM
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Teen apparel retailer Abercrombie & Fitch Co. (ANF - 30.77) has beaten a steady path down the charts during the past 12 months, with the shares losing more than half of their value in that time. The stock's most recent bout of technical troubles came on the heels of its May 15 first-quarter earnings announcement, in which the company reported an 88% drop in profit. While the earnings-per-share results of three cents just beat analysts' expectations, sales were below the Street's outlook. Investors responded accordingly, with the stock falling 13% in the session that followed.

Daily Chart of ANF since January 2012

The gloom and doom wasn't over for ANF, however. On May 17, the brokerage bunch responded to ANF's dismal results, and smacked the struggling security with a slew of downgrades and price-target cuts. The equity backpedaled an additional 7%, ending the session at $36.55. ANF has continued to falter, hitting a new two-year low of $30.64 earlier today.

So why would ANF's price action be susceptible to such lofty price swings in such a short amount of time? Well, it is a well-known fact that scheduled events, such as earnings announcements, can often command big price swings in a stock. In ANF's case, two quarters in a row of significant bottom-line dips combined with the company's first-quarter sales miss prompted not only a sell-off among investors, but a change of mind among optimistic analysts who believed in ANF's growth potential.

These high expectations surrounding the low-performing stock ahead of this scheduled event provide a prime example of how to apply Schaeffer's 3-tiered methodology to analyzing stocks, known as Expectational Analysis. Simply put, Expectational Analysis combines technical, fundamental, and sentiment analysis to predict a stock's future direction. ANF's dismal technical backdrop coupled with its recent fundamental struggles did not justify the bullish stance taken by the Street -- leaving the door wide open for an additional move to the downside on any negative news.

By applying this methodological approach to ANF ahead of earnings, an investor may have been able to profit off the stock's post-earnings plunge. Should you be worried if you missed out on this opportunity? The answer to that question is no. As it turns out, any pessimism brokers expressed toward the security in the immediate aftermath of ANF's quarterly announcement has been tempered, and Wall Street continues to disregard ANF's technical and fundamental trouble.

No fewer than 13 covering analysts maintain a "buy" or "strong buy" recommendation toward the stock, compared to 17 "holds," with not a single "sell" to be found. Plus, Wall Street's consensus 12-month price target of $49.94 represents an unashamed 62% premium to ANF's current perch.

With prevailing sentiment running counter to the security's current trajectory, ANF could be poised to experience additional headwinds in the near term. Contrarians take note -- the company is tentatively scheduled to take its next turn in the earnings confessional on Wednesday, Aug. 15. Wall Street is calling for a per-share profit of 35 cents.

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