What a brutal six months it’s been for American Eagle. The stock has dropped 45.9% and now trades at $10.52, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in American Eagle, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is American Eagle Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than AEO and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, American Eagle grew its sales at a sluggish 4.3% compounded annual growth rate. This fell short of our benchmark for the consumer retail sector. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect American Eagle’s revenue to drop by 2.7%, a decrease from its 4.3% annualized growth for the past five years. This projection doesn't excite us and suggests its products will face some demand challenges.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
American Eagle historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.
Final Judgment
American Eagle isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 6× forward price-to-earnings (or $10.52 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Like More Than American Eagle
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.
