We're adding to this troubled retail stock, betting management is finally waking up

Published Wed, Apr 20 20222:31 PM EDTUpdated Wed, Apr 20 20222:39 PM EDT

We're buying 450 shares of American Eagle Outfitters (AEO) at roughly $17.51 each. Following Wednesday's trade, the portfolio will own 4,000 shares of AEO, increasing its weighting in the portfolio to about 2.13% from 1.90%. We are pulling the trigger on some shares of American Eagle Outfitters, with the stock finally having its first down session since our recent upgrade. The stock has dropped about 30% year to date. As you may recall, we upgraded our AEO rating to a 1 back on April 12 at $16.63 per share. At the time, we thought the market had gotten way too negative about American Eagle Outfitters' growth prospects with shares trading at 8x earnings with a 4.3% dividend yield. Additionally, we felt encouraged by the health of the U.S. consumer following a discussion with JPMorgan retail analyst Matthew Boss on Mad Money. Boss appeared on the show April 11 to discuss the key themes from his 9 th annual Retail Round Up Conference. At a time when many investors have been concerned about inflation and how elevated gas prices have eaten into the discretionary spending budgets of many, Boss said many management teams in retail have expressed "cautious optimism" for the second half of the year. Supporting this view is low unemployment, wage growth, and additional work-hour opportunities. Specific to American Eagle Outfitters, we felt much better about the company after Boss published his takeaways from a meeting with management. We discussed several of the key points in our upgrade article, but the one we want to reiterate Wednesday is the possibility of strategic alternatives. In Boss' research note, he wrote that management said "strategic alternatives would be pursued should the macro-environment stabilize and AEO's valuation remains at ~$3B, which implies AE [American Eagle] worthless and Aerie only ~7.5x EBITDA" based on JPMorgan's sum-of-the-parts (SOTP) math. The American Eagle brand is causal wear and Aerie makes women's intimates, activewear and swimwear. This part jumped out to us because it finally sounds like AEO management has become fed up with how poorly their stock has traded. Over the past year, AEO's stock has been cut in half. As we wrote last week, whether it be through a potential spin-off of Aerie — where a breakup cost would be reasonable — or perhaps a share repurchase program, we don't want to be so negative about a stock when management is actively looking to create value. (Jim Cramer's Charitable Trust is long AEO. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Nina Nesbitt attends the American Eagle Outfitters VIP store launch at Westfield London on November 13, 2014 in London, England.

David M. Benett