Schaeffer's Trading Floor Blog

Weekly Contrarian: Can Abercrombie & Fitch Prove the Skeptics Wrong?

ANF could enjoy contrarian tailwinds, should the stock continue to move higher

by 9/6/2012 11:19 AM
Stocks quoted in this article:

Publication: Bloomberg BusinessWeek
Publication title: At Abercrombie & Fitch, Sex No Longer Sells
Publication date: 8/30/2012

Brief Summary

The author argues that retailer Abercrombie & Fitch Co. (NYSE:ANF) has lost its shock value, with today's teens less affected by the company's lascivious advertising methods of old. This general lack of interest, combined with an economy that is less forgiving toward overpriced attire, was reflected in its declining revenue during the first half of fiscal 2012.

The author contends, however, the company is in a position to find relevance again, by adjusting its marketable cool to a new crop of teenagers that have "developed a more individual style from exposure to fashion via the Web and social media." In fact, lower-priced sector peer American Eagle Outfitters (NYSE:AEO) has proven the ability to adapt can be successful, with the merchant posting solid sales growth in the first two quarters of the current fiscal year.

Additionally, ANF's recent endeavors into emerging markets are flourishing, with sales at its newly opened Hong Kong flagship store topping the $1 million mark in its first five days.

Contrarian Takeaway

An initial glance at ANF's chart is somewhat disconcerting. The stock has lost around 44% on a year-over-year basis, and 27% in 2012. More recently, though, the equity has shown it still has life, rebounding nearly 24% since finding an annual low of $28.64 on Aug. 2. Also, ANF has outperformed the broader S&P 500 Index (SPX) by almost 12 percentage points during the past 20 sessions.

Bearish sentiment remains steep toward the stock, despite this recent run up the charts. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.23 puts for every call over the last 10 sessions. Plus, this ratio ranks in the 81st percentile of its annual range, implying puts have been scooped up over calls at an accelerated clip in recent weeks.

Outside of the options arena, short sellers have made their stance toward ANF more than clear. Short interest ballooned by 42% in the last two reporting periods, and now accounts for a healthy 12.1% of the stock's float. What's more, short interest is now at its highest level since early 2011. Given ANF's steep bounce from its recent low, the stock could potentially benefit from short-covering activity going forward.

The unease is evident among the brokerage bunch, as well. No fewer than 19 out of 29 analysts maintain a "hold" or "strong sell" rating toward ANF. Likewise, the consensus 12-month price target of $38.23 represents a middling 10% premium to the Sept. 5 closing price of $34.61. A round of upgrades or price-target hikes, in light of the equity's current display of positive price action, could bring about a fresh wave of buying power.


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