Buy Low?

Abercrombie & Fitch (ANF) is a good buy-low candidate now that margins are expected to increase later in the year.

ANF stock got creamed late last year when the company had to slash prices to sell stuff (it was a warm winter). Inventory buildups are a warning sign for retail investors. My first lesson on this was with Tommy Hilfiger in 1998. At the time I was training to be a Financial Consultant. During a training course I was asked to bring one stock idea to the audience. I picked Tommy.  Tommy Hilfiger was hot — everyone was buying the stuff. Growth was great and the P/E was low. Then the stock fell before the earnings did, and the stock got slammed. Inventory built up at the stores as people either bought knock-off Tommy gear or just got sick of the stuff. Then the orders for Tommy gear stopped. 

One Year Chart

Here’s ANF’s one-year chart. Notice the fall in late-2011. Now ANF has built a base could break out with a move over $50.

The Estimates look bad but if the company quits slashing prices then profits could beat the street. Still, that might not happen until late 2012.

I love the P/E of 14. I think ANF will make $5.00 one year in the near future and get a 18 P/E off that. That’s a move from $48 (today) to $90. Almsot a double.

Bottom Line

ANF is selling for 14 times earnings and the news has turned from bad to good. What I don’t like is 2012 estimates just fell from $4.19 to $3.51 this quarter — yes this quarter. So the news got better yet the estimates fell. That’s a head scratcher. Maybe the analysts aren’t good enough to guage earnings very well, and are going off company guidance instead of sticking their neck out. Still, I like this stock as a conservative growth stock that has solid upside for the next three-to-five years.