Abercrombie & Fitch's 60% Upside Might Be Too Good to Miss
It’s been a wild two years for investors of Abercrombie & Fitch Company (NYSE: ANF). At the start of September 2022, the retail stock was trading near multi-year lows, having set its last all-time high back in 2021. They may not have known it then, but the brave investors snapping up the stock while it was trading for less than $15 a share were getting in on the ground floor of what would become a 1,200% rally.
This rally continued all the way through May of this year, but as we hit the second anniversary of its inception, Abercrombie is in a bit of trouble. Its shares have had a volatile couple of months of trading and are on track for their third down month in a row—something that hasn’t happened since the first quarter of 2020. They’re down about 30% from May's high, having been down by as much as 40% during August’s market-wide sell-off.
However, there are several reasons to be bullish and to think we could be looking at a serious entry opportunity here. Let’s jump in and take a closer look.
Abercrombie & Fitch's Bullish Fundamentals
For starters, there’s the company’s strong fundamental performance. Last week, Abercrombie released its Q2 earnings report, which topped analyst expectations for both headline numbers. The company’s earnings were more than 12% higher than expected, while revenue for the quarter was also hot and up 21% on the year.
It’s always important to show the market that you did well, but equally, if not more important, is the need to show the market that you’re going to continue doing well, and Abercrombie did this, too. The company boosted its full-year outlook for net sales growth from 12% to 15% and for its operating margin from 14% to 15%.
By any measure, it was a strong report, with CEO Fran Horowitz commenting that “we are on track and confident in our goal to deliver sustainable, profitable growth this year, while making strategic long-term investments across marketing, digital and technology, and stores to enable future growth.”
Abercrombie’s Weak Price Action: A Hidden Opportunity for Investors
However, that didn’t stop Abercombie shares falling 20% in the immediate aftermath of the report, a drop they’ve struggled to undo. But in light of the earnings results, and the subsequent comments from a wide range of analysts, we’re inclined to say this is creating a seriously appealing entry opportunity.
In the aftermath of last week’s report, the Telsey Advisory Group reiterated their Outperform rating on Abercrombie & Fitch stock, along with their $208 price target. Citigroup then upgraded them from Neutral to Buy, with a $190 price target, while just yesterday, the Jefferies Financial Group team boosted their price target on Abercrombie up to $220. Considering the stock closed below $140 on Wednesday evening, that’s pointing to a targeted upside of nearly 60%.
Reasons to Be Optimistic About Abercrombie’s Growth Potential
There were some common themes among the various teams’ reasons for taking such a bullish stance. The group’s Hollister brand for example is performing exceptionally well, while the potential for further store openings globally is way ahead of its peers. Citigroup for example sees at least 18 new stores being opened next year, a trend that should help drive market share expansion and overall revenue.
There’s also the company’s balance sheet, which has no debt and more than $1 billion in cash. At the same time, Abercrombie’s price-to-earnings ratio is just 15, far below the likes of Lululemon Athletica Inc (NASDAQ: LULU) at 20 or Macy’s Inc (NYSE: M) at 24.
Abercrombie’s Sell-Off: A Buying Opportunity as Analysts Remain Bullish
Technically, the stock is verging on oversold conditions, with its relative strength index (RSI) currently below 40. Anything below 30 suggests a stock is extremely oversold, so you can understand the current bargain with Abercrombie down here. If you’re considering getting involved and chasing that targeted upside, watch for shares to hold the $135 level.
This is where the bears ran out of steam last week, and it’s crucial they hold this in the coming sessions. Otherwise, they’d risk a breakdown towards $125. But even then, we’ve seen how well the company is performing underneath the hood and how bullish the analysts are, so it feels like any further selling is only creating greater entry points.
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