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Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

What's Cool at School by Leslie P. Norton

  • Highlighted companies: American Eagle Outfitters (AEOS), Abercrombie & Fitch (ANF), Pacific Sunwear (PSUN), Hot Topic (HOTT), Federated Department Stores (FD)
  • Summary: The article analyses "teen stocks" - retailers whose product lines cater to pre-adults. Sector analysis: Despite strong recent gains, the group is historically undervalued: The JPMorgan Teen Retailer Index currently commands 15 times 2007 estimates, below its five-year range of 17-20 times forward profits; earnings are forecast to grow more than 15% a year. Who's hot and who's not: Shares of American Eagle Outfitters (AEOS), with about 870 stores, are up 74% this year. Same-store sales in August jumped 11%. American Eagle trades for 16.7 times '07 estimates of $2.32 a share (and an even-more attractive 14.2 after factoring-in $5/share cash). Abercrombie & Fitch (ANF) August same-store sales rose 6%, beating forecasts. A&F shares are flat this year, but trade for just 14.2 times expected earnings. Pacific Sunwear (PSUN) and Hot Topic (HOTT) have had a tougher time. Hot Topic's shares are down 33% this year, and August same-store sales dropped 6%, despite heavy discounting. Pacific Sunwear is down 47% on the year; same-store sales fell 9.4%. At Federated Department Stores (FD), same-store sales rose 3.8% last month; the stock trades for 17 times estimated earnings. Outlook: If history is any guide, the teen rally may fizzle in Q4, as concerns about holiday sales often lead to underperformance. But teen stocks typically outperform in the spring.
  • Quick comment: The S&P equity research team picked AEOS as one of their "10 Stocks for a Struggling Market." It was also picked by Delphi Management's Scott Black during the annual Barron's Roundtable of investment pros. Faisal Lelijee likes ANF as one of his "Four Undervalued Retailers." And Catablast Media picks PSUN as one of its "Four Back-to-School Plays." In Estee Lauder's 4Q conference call, executives discussed the impact of the May merger on sales. For broader exposure to the industry, consider retailer ETFs such as the Retail HOLDR ETF (RTH) and the Consumer Discretionary Sector SPDR (XLY). Companies such as Wal-Mart (WMT), Amazon.com (AMZN) Lowe's (LOW) and Target (TGT) allow the opportunity to play the retail market without having to deal with the "tempestuousness" of the teen shares.
200-day Chart - Teen Retailers and Two ETFs
Source: Teen Stocks - Tempting or Tempestuous?