Right Idea, Wrong Example
Let's look back at my analysis of Abercrombie & Fitch to see where it went wrong and what I would do next.
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Upon seeing the rather dilapidated classic Porsche that one Seinfeld TV show writer had purchased, Jerry Seinfeld allegedly said, “Right idea, wrong example.”
Well, I’ll claim the same result from my recent analysis of Abercrombie & Fitch ANF.
Picking a Consumer Cyclical stock was the right idea. Abercrombie was the wrong example.
Here’s a chart of the Consumer Cyclical ETF, XLY.
The purple line is SPY, which is up about 0.5%, while XLY has gained about 5.5%. So, I was hunting in the right area. The Relative Strength line is pointing upwards and shows how XLY has continued to beat the S&P 500.
But Abercrombie is off 11.5% during that same time.
What went wrong?
Well, fundamentally, not much has changed. In fact, the only new news is that ANF is going to be entering India, which is a pretty large market. The bigger news is that American Eagle Outfitters announced bad earnings on December 4th. ANF shares were down only slightly on that news, but then cratered on December 9th.
Timing is everything.
So, where does that leave us now?
While it’s never a good idea to throw good money after bad, ANF shares are at an interesting juncture.
As you can see in the chart above, ANF has support from two trendlines between about 130 and 137. Below 130, I’m wrong. Above 130, my original case remains.
That said, whereas my original target price was over $200, now, I’d be interested in profit-taking around $160, and would want ANF to spend a little more time over $160 before thinking $200 was back in play.
So, if ANF was the “right idea, wrong example,” what should I have bought in this space?
The answer is simple. In this market, it’s been the mega-cap names that have been the leaders. So boring! But it’s worked.
As Doug Kass said in our October panel discussion, the Mag 7 are the place to be right now.
Looking at XLY’s top holdings, Amazon AMZN and Tesla TSLA represent more than 40% of the ETF’s AUM. Since 12/3, AMZN is up nearly 8% while TSLA is up 21%. The other stocks in the top 10 are a mixed bag.
It's a concentrated market and you've got to be selective.
