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No. of Recommendations: 13
Merchandise well bought is merchandise well sold. --John Neff's dad


I am selling American Eagle (AEOS) because I do not know what its competitive advantage is.

I still think the Pittsburgh, PA-based retailer is undervalued. But competitive advantage is the connective tissue between earnings quality (past) and valuation (future). And since AEOS does not have any of Morningstar's four kinds of competitive advantages (low-cost producer, high switching costs, intangibles, and network effect), I am happy to sell into strength.

We made a few bucks on this name, but I want to focus on companies with wider moats. Since I wrote about American Eagle on this site, I wanted to let you know about my decision.



Hewitt
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No. of Recommendations: 1
Hewitt,

Thanks for keeping us updated, and of course, thanks for posting your thoughts in the first place.

I share your concerns about competitive advantage, but am now sitting on a substantial short term capital gain (a nice problem to have). Therefore, I sold some calls to cover a portion of the position to generate a little cash while I wait my year and a day.

BBQ
may all your gains be in a tax advantaged account
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No. of Recommendations: 3
And since AEOS does not have any of Morningstar's four kinds of competitive advantages (low-cost producer, high switching costs, intangibles, and network effect), I am happy to sell into strength.

U don't think we can neatly categorize all sectors by Morningstar's criteria. For sure its hard to assign a competitive advantage to any clothing retailer. That's not what makes them good investments though.

Clothing retailers grow by setting or following fashion trends and through customer loyalty, and of course growth is what drives stock prices. The competitive advantage in retailing is provided by the management team and AEOS seems to be doing a good job there. I recommended AEOS 12/2/05 @ 20.82 and think it likely to go higher over the upcoming years though I certainly won't fault anyone for taking a short-term 30-40% gain and AEOS has gotten a bit ahead of itself with yesterday's price spike.

We made a few bucks on this name, but I want to focus on companies with wider moats. Since I wrote about American Eagle on this site, I wanted to let you know about my decision.

I, for one, appreciate your discussion of individual stocks on this board. Concerning moats, I wonder what you think of Wrigley (NYSE:WWY), which is a company I think is beginning to represent a value play.

ab

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Thanks for this Hewitt... AEOS hit three main criteria for me. It was a TMF recommendation (maybe a 10% weighting in importance to me), a greenblatt magic formula pick (another 40%) and it passed the IETC tests (another 40%). Seeing its popularity in my area also swayed me.

Either way, thanks for the info.

-silencer


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No. of Recommendations: 2
I have made a neat > 30% return on this stock since December.
Here are some of the reason why I bought the stock

1. Extremely cheap valuation
http://boards.fool.com/Message.asp?mid=23437482
2. High ROE and potential to deploy more capital ( new store concepts)

In retail I believe a few things are important

1. Inventory management
2. Margins
3. Marketing to drive traffic and Positioning - AEOS is trendy wear at a cheaper price then say ANF
4. Capturing fashion trends - Predicting cash flows is a problem

Of this I believe the last is tricky and difficult to predict. For the rest AEOS is doing a great job. It still trades at 15 PE.

But this thread does encourage me to check the attractivness of AEOS at current levels.

Vik






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No. of Recommendations: 0
Therefore, I sold some calls to cover a portion of the position to generate a little cash while I wait my year and a day.

BBQ,

I hope you know that selling deep-in-the-money can suspend or even erase the period you have been holding the stock, for tax-purposes.

If not Publication 550 can help, or the tax board, or:

http://boards.fool.com/Message.asp?mid=12322382

Regards,

M
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No. of Recommendations: 0
M,

Thanks for the word of advice. I sold 50% of my calls at $35, 25% at $40, and 25% at $30.

By the way, that is an exceptional explanation of the tax ramifications of covered calls.

BBQ
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No. of Recommendations: 2
Hi Hewitt,

Just wondering if you think it's possible for any retailer to have one of the Morningstar competitive advantages you mention.

I personally think American Eagle's competitive advantage right now is brand popularity and loyalty among its primary consumers--teenagers. I teach in a public high school and see AE clothes walk the halls a lot. The only other brand that I probably see as much is Abercrombie.

Of course, the teen market is notoriously fickle and can be hard to predict. But I figure I'll hang on until I stop seeing as many new AE logos in my classroom.

elp2
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No. of Recommendations: 0
You can argue that GAP had the same cache awhile back ....it's hard to predict the next cool thing on a regular basis.

This is not what I call sustainable competive advantage
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