Bears Call an End to American Eagle Outfitters Stock Rally

AEO stock has more than doubled in value over the past year

Aug 27, 2018 at 9:23 AM
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American Eagle Outfitters (NYSE:AEO) has been one of several retail stocks to find new life in 2018. In fact, if you go back over the past 12 months, AEO shares have more than doubled in value, based on Friday's settlement of $28.41, and they hit a more than 10-year high of $29.88 last week, too. But with the company set to report earnings before the open this Wednesday, Aug. 29, skepticism is beginning to seep in around the equity, including an analyst downgrade just this morning.

Wedbush just lowered its AEO rating to "neutral" from "outperform," saying it's moving to the sidelines with the stock near its $29 price target. The brokerage firm suggested that L Brands (LB) recent struggles could give American Eagle Outfitters a chance to gain market share, which may mean more promotional activity in the near term.

Bearish sentiment is building elsewhere, as well, with short interest jumping by more than 32% in the past two reporting periods. More than 16.5 million AEO shares are now held by short sellers, or more than 10% of the float, and going by average daily volumes it'd take these bears four sessions to cover their positions.

It's a similar setup in the options pits, where traders in recent sessions have focused on puts. For example, in just the past five trading days, the weekly 8/31 29-strike put saw the largest increase in open interest, and data from the major options exchanges points to buy-to-open activity. As such, these bearish traders are betting on American Eagle Outfitters falling further below $29 by the close this Friday.

A quick look at recent earnings releases shows the stock has struggled following such quarterly reports, with the shares closing lower the day after the last two, including a 9.4% nosedive back in March. On the other hand, AEO jumped 7.8% in this quarter last year the day after earnings. The security is down 1.5% before the open this morning.

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