Validea is an intriguing newsletter that selects stocks based on the strategies of the market's most legendary investors. Here, editor John Reese takes a look at Aeropostale (NYSE: ARO).
"This mall-based clothing retailer targets youngsters age 14 to age 17 through more than 900 stores in 49 states, Puerto Rico, and Canada.
"The company has developed a new retail store concept called P.S. from Aeropostale, which will offer casual clothing and accessories focusing on elementary school children between the ages of seven and 12.
"In the past year, the $2.6 billion market cap firm has raked in more than $2 billion in sales. Aeropostale has an impeccable earnings history, upping earnings per share in every year of the past decade. It's at it again this year, with EPS and sales rising in each quarter so far in 2009.
"Aeropostale gets approval from three of my Guru Strategies, those I base on the approaches of Peter Lynch, Warren Buffett, and James O'Shaughnessy. The stock also gets approval from the price/sales strategy of Kenneth Fisher.
"In Fisher's strategy, The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values.
"ARO's P/S ratio of 1.37 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.
"Under this methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. ARO's inflation adjusted EPS growth rate of 24.81% passes the test.
"Fisher looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses.
"This is based on the premise that companies without cash will soon be out of business. ARO's free cash per share of 1.68 passes this criterion.
"In addition, his strategy looks for companies that have an average net profit margin of 5% or greater over a three year period. ARO, whose three year net profit margin averages 7.86%, passes this evaluation."
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