Roof Leaker To Watch: American Eagle Outfitters (AEO)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified American Eagle Outfitters ( AEO) as a "roof leaker" (crossing below the 200-day simple moving average on higher than normal relative volume) candidate. In addition to specific proprietary factors, Trade-Ideas identified American Eagle Outfitters as such a stock due to the following factors:

  • AEO has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $80.0 million.
  • AEO has traded 3.4 million shares today.
  • AEO is trading at 1.99 times the normal volume for the stock at this time of day.
  • AEO crossed below its 200-day simple moving average.

'Roof Leaker' stocks are worth watching because trading stocks that begin to experience a breakdown can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower. Regardless of the impetus behind the price and volume action, when a stock moves with weakness and volume it can indicate the start of a new, potentially dangerous, trend.

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More details on AEO:

American Eagle Outfitters, Inc. operates as a specialty retailer of clothing, accessories, and personal care products in the United States and internationally. The stock currently has a dividend yield of 3.6%. AEO has a PE ratio of 57.6. Currently there are 7 analysts that rate American Eagle Outfitters a buy, 2 analysts rate it a sell, and 9 rate it a hold.

The average volume for American Eagle Outfitters has been 6.1 million shares per day over the past 30 days. American Eagle Outfitters has a market cap of $2.7 billion and is part of the services sector and retail industry. The stock has a beta of 1.05 and a short float of 14.3% with 4.08 days to cover. Shares are down 10.1% year-to-date as of the close of trading on Friday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates American Eagle Outfitters as a hold. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity.

Highlights from the ratings report include:
  • AEO has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.70 is somewhat weak and could be cause for future problems.
  • Net operating cash flow has increased to $33.98 million or 16.39% when compared to the same quarter last year. Despite an increase in cash flow, AMERN EAGLE OUTFITTERS INC's average is still marginally south of the industry average growth rate of 20.78%.
  • AEO, with its decline in revenue, slightly underperformed the industry average of 1.5%. Since the same quarter one year prior, revenues slightly dropped by 2.3%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, AMERN EAGLE OUTFITTERS INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for AMERN EAGLE OUTFITTERS INC is currently lower than what is desirable, coming in at 33.43%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 0.81% trails that of the industry average.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

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