The G-Man Initiates Coverage Of AEOS With A

February 15, 2001
Goran Yordanoff

I want to
make it clear that I am merely trying to bring to light the recent
activity in one of the apparel retailers that has enjoyed a 500%+ run in the
past seven months. When
you look through the entire sector of apparel stocks and
retailers, you will see a similar trend of high volume insider selling
over the course of the
past few months. Let’s take a look at a few of them:

The first of which is American Eagle
Outfitters (AEOS). Yesterday, the Dow Jones
Newswire posted a summary of insider trading activity for this stock.

It read as follows:

FILER: SCHOTTENSTEIN, JAY L.

TITLE: Chairman of the Board

TRANSACTION: Sale: 1,700,000 — 01/05/01-01/11/01 — $46.27-$47.96

OWNERSHIP: 8,695,845

FILER: RETAIL VENTURES INC.

TITLE: Beneficial Owner

TRANSACTION: Sale: 1,000,000 — 01/05/01-01/11/01 — $46.27-$47.96

OWNERSHIP: 4,855,450

FILER: HOFFMAN, GERALDINE
SCHOTTENSTEIN

TITLE: Beneficial Owner

TRANSACTION: Sale: 800,000 — 01/05/01-01/11/01 — $46.27-$47.96

OWNERSHIP: 7,931,109

FILER: DESHE, ARI

TITLE: Director and Beneficial Owner

TRANSACTION: Sale: (Option Related) 210,500 — 01/05/01-01/11/01 —
$46.27-$49.17

OWNERSHIP: 4,015,779

FILER: KOLBER, GEORGE

TITLE: Officer and Director

TRANSACTION: Sale: 59,628 — 01/05/01-01/30/01 — $46.27-$96.00

OWNERSHIP: 256,878

FILER: LEEDY MICHAEL J

TITLE: Vice President

TRANSACTION: Sale: (Option Related) 42,417 — 01/12/01 — $50.03-$50.04

OWNERSHIP: 20,000

FILER: DOOLAN, MARTIN P

TITLE: Director

TRANSACTION: Sale: (Option Related) 11,500 — 01/09/01 — $48

OWNERSHIP: ZERO

FILER: MARAKAS, JOHN L

TITLE: Director

TRANSACTION: Sale: (Option Related) 19,500 — 01/31/01 — $57.25-.88

OWNERSHIP: 26,500

In addition, there were several
corporate sellers who blew out of much smaller
quantities of stock ranging from 4,000 shares to 10,000 shares. I only
listed the larger block sellers above.

If these insiders are selling such
enormous quantities of their own stock, why should
we be buying it?

The total of these insider sales for
the past month is around 3.8 million shares
of stock. The float on AEOS has been 12.1 million shares with 46.44
million shares outstanding. Keep in mind
that any insider sales come from the “shares
outstanding” number and are added to the float once they are sold on
the open market.

As you can see on the chart below,
AEOS has risen nearly 500% in the past seven months.
Yet after this incredible run and excessive insider sales, we have not
heard any warnings or negative comments from the analyst community.
Makes you wonder, eh?

The chart below clearly displays the
red carpet being laid out for the 3.8 million shares of AEOS that were sold last
month. There were millions more sold
by insiders during the prior six months.

The only slightly cautionary comments
I have found concerning AEOS were issued by analyst Janet Joseph Kloppenburg of
Robby Stephens:

“AEOS shares currently trade at
24.6x our $2.37 F2001 EPS estimate, a significant premium to the specialty
apparel peer group’s 16-17x F2001 P/E multiple…At
the shares’ current premium valuation, the stock appears to be
fully discounting the upside potential that we believe AEOS’s current
business momentum is
capable of generating. Therefore, we believe the shares
are best suited for longer-term oriented investors, given that near-term
appreciation may not be significant.”

Still, this analysts does not address
the unusually high insider selling activity
that has taken place with the stock.

From a fundamental perspective,
although AEOS and other specialty retailers have
been issuing news releases about their increases in sales totals, we
have not heard any
positive comments about the integrity of their profit margins.
In fact, it is widely known that retailers across the board deeply
discounted their
merchandise in December and January in order to decrease their
inventories.

This appears to be the same dilemma
that has plagued the personal computer manufacturers.
Sales numbers are healthy, but profit margins have suffered considerable
due to discounting.

Hey, AEOS insiders and analysts, The
Crocodile Hunter (Steve Irwin) just called. He wants all of you on his
“World’s Most Deadliest Snakes” show.

On to the other casino, the Nasdaq
Composite.

As seen in the chart above, the Nasdaq
Composite met resistance and turned back
down at the level I pointed out yesterday. As such, unless the market
can shrug off the
additional bad news it was handed aftermarket, it appears as
though this resistance will hold.

Isn’t it interesting that once again
we heard about all the institutional and mutual fund buying that took place
today, when in fact, the market was too weak
to break through primary resistance on a 60-minute chart?

After the close today, Nortel Networks
warned of a sharp first quarter earnings and revenue shortfall, saying that the
U.S. economic slowdown is “faster
and more severe” than it had expected. Also, it did not expect a
significant recovery in
the broader economy before the fourth quarter. In addition,
Nortel announced another 4,000 jobs would be slashed, on top of the
6,000 jobs already cut. In
addition, Dell Computer announced that it would lay
of 4% of its workforce and failed to meet its lowered EPS forecasts of
0.19 per share.

This market is looking like it is
operating in a plastic bubble that is unfazed by reality. It is only the
“perception” of reality that matters. If
I recall correctly, didn’t the crew of the Titanic have its orchestra play
on the deck to calm the
passengers as the ship was sinking?

Long Watch: After the
close today, nothing looks safe.

Short Watch: Same as yesterday, plus
technology if the NASDAQ doesn’t bounce immediately
after a possible gap down tomorrow morning.

Have a nice evening and a pleasant
tomorrow.

Goran

The G-Man Initiates Coverage Of AEOS With A

BUY THE FEAR, SELL THE GREED

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