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Sometimes, the market just makes you shake your head. Such is the case with American Eagle Outfitters (NYSE:AEO), a teen retailer which has seen its stock fall 14% in less than three weeks. There may be some reason for profit-taking; the stock had better than doubled in little more than a year, hitting a 5-year high in October at $22.97 per share.

But much of the recent fall has come from two major moves; the stock dropped nearly four percent - and over 8 percent midday - after an investor day call in late October, and fell another four percent Thursday. Today's drop appears to be in sympathy with Aeropostale (NYSE:ARO), which fell over six percent after Detwiler Fenton argued Aeropostale was headed for weak traffic and sales in Q3.

Neither move made a whole lot of sense. AEO simply noted "it was on track" for its Q3 sales target on the investor call; as Evren Kopelman of Wells Fargo (NYSE:WFC) wrote in a note, the drop was "a result of the company not at least guiding to the high end or raising third quarter guidance." This seems a high bar for a stock, though it granted is one the company has in part set for itself, as it raised its annual guidance after Q2 results after having pre-announced better-than-expected earnings for that quarter.

AEO's fiscal year guidance is now $1.33-$1.36 per share, up sharply from an adjusted figure of $0.97 per share a year ago. The fact that analysts should be disappointed with what is expected to be year-over-year earnings growth around 40 percent shows just how silly the four percent drop was. If analysts truly expected a Q3 beat, the stock simply should have been priced higher anyhow.

At the midpoint of its current guidance, AEO still sports a forward P/E below 15 at Thursday's close of $19.69. In addition, the company features a strong balance sheet, with $1.44 per share in net cash (accounting for a payment of $1.50 per share special dividend last month) and a solid dividend yield of 2.23%. The company has not been particularly aggressive in increasing that dividend, but with the special dividend now paid and earnings increasing, a payout hike - which would be the first since the spring of 2010 - may be overdue.

In short, there are a lot of reasons to like AEO stock. There are, of course, macroeconomic worries, and the company caters predominantly to a notoriously fickle teen audience. But AEO's performance has been good enough over the past few quarters to double the stock, which makes today's drop particularly confusing. Aeropostale's weakness is hardly a reflection of American Eagle's potential for the third quarter; as noted, American Eagle management said it was on pace to meet sales forecasts for the quarter in a call that took place just one week before the third quarter ended. Certainly, if there were worries about third quarter earnings, to be released later this month, AEO management would likely have said something during its investor day.

The argument seems to be that Aeropostale, along with Abercrombie & Fitch (NYSE:ANF), is one of American Eagle's chief competitors, and its weakness might reveal similar traffic and sales issues at AEO and ANF. But Aeropostale is a company in disarray. As this site noted in its "Market Currents" section, Aeropostale has posted six consecutive quarters of earnings declines. Earlier this year, it had to slash prices because its "back to school" merchandise could not compete with AEO and other mall-based retailers.

So, if Aeropostale is continuing to struggle - and, most likely, still failing to keep up with American Eagle - why exactly is that bearish for American Eagle? Dropping AEO because of struggles at ARO is like selling Macy's (NYSE:M) because JC Penney (NYSE:JCP) is collapsing. There's little, if any, evidence that Aeropostale's struggles can be blamed on much more than that company's own failure to execute. If anything, that failure is bullish, not bearish, for AEO, which is seeing a key competitor left behind.

Again, both the investor day call and the negative commentary toward Aeropostale may simply have been used as excuses, rather than reasons, for profit-taking. But a 14% drop in AEO in 13 trading sessions makes no sense, since the last two weeks have provided more, rather than less, evidence that the company will likely meet or even exceed its quarterly and annual guidance. There may be a short-term trading opportunity as the market realizes its mistake; the recent drop may also have lowered expectations for Q3, increasing the likelihood of a post-earnings bounce later this month. For the long-term, a solid dividend yield, a fortress balance sheet, and impressive recent execution make AEO worth at least a long look below $20 per share. It appears that as of late, the market has made a big mistake in valuing AEO. Investors should look to take advantage.

Source: American Eagle Has Dropped For All The Wrong Reasons