Aeropostale Is Worth a Look, Not a Touch

Psst! In a hurry to get filthy stinking rich? (Yes, of course you are.) Then check out the June 9 edition of Business Week for its 100 "Hot Growth Companies," each with a market value under $1.5 billion. Odds are that some of these tiny acorns will become giant oaks in the next decade, making those who buy now and hold oh-so-happy.

Who's at the top of the list? It's Aeropostale (ARO - commentary - Cramer's Take), the seller of half-a-billion dollars a year in teen essentials like surf dragon T-shirts, Capri pants, Cement belts, and Puka necklaces. According to the company Web site, "We provide our customers with a focused selection of high-quality, active-oriented, fashion basic merchandise at compelling values in a high-energy, entertaining store environment." (It seems someone is getting paid by the adjective.)

I've never set foot in any of Aeropostale's 400 mall-based stores. That's because I'm TOTH -- Too Old and Too Heavy. No matter; I'll still show you what the retailer must do to put its owners on Easy Street.

My playbook for finding what Peter Lynch famously called "ten-baggers" (stocks that will gain 10 times their original value) starts with another retailer, Gap (GPS - commentary - Cramer's Take). Between 1995 and 1999 it had accrual, defensive and enterprising profits (see the Earnings Power Glossary for explanations of these terms). Thus, Gap was able to self-fund and create value, my definition of a company with authentic earnings power.

Even better, Gap also was forging an Earnings Power Staircase. Of all the companies for sale on Wall Street, Staircases are the best ones to own for the long-term cautiously greedy investor. During this period, $10,000 worth of Gap stock grew to $90,000.

Now, Aeropostale. For the 12 months ended Feb. 1, 2003, the company was profitable on all three counts. So far, so good.

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Hewitt Heiserman has been a financial analyst for 15 years and has worked for Fidelity Investments, Simplex Time Recorder, American Holdco and Breakaway Solutions. He is now writing a book on the Earnings Power Box, an analytical model he created to gauge the quality of a firm's profits. (The Earnings Power Box is a trademark of Hewitt Heiserman.) At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].