Boeing can take American Eagle Outfitters to the sky

The broader markets are trading solidly higher Thursday, ahead of Friday's much awaited monthly jobs report that will be the key economic reading for the Federal Reserve in its evaluation of the recovery in the labor market. We would like to provide some updates about two major stocks in our portfolio, following recent developments. 

We're Still Comfortable in American Eagle Outfitters

The first stock we want to talk about is American Eagle Outfitters (AEO). Shares had a pretty nasty day Wednesday, falling about 5% on no company news. Today shares have recovered about more than half of yesterday's losses.

The recent volatility in the stock did not prevent analysts at Barclay's from raising their price target on AEO this morning to $46 from $45 (implying ~36% upside from here) and increasing their earnings per share forecast for this year to $2.20 from $2.04 (consensus $2.13) and $2.65 from $2.48 (consensus $2.32) next year. The price target bump and estimate change were made in response to the analysts' proprietary check on the amount of the promotional activity at retailers. Interesting for these retailers, less promotional activity is viewed as a sign of strength, because it means they are selling more merchandise at fuller prices, leading to better margins and higher earnings.

American Eagle Outfitters was one of three companies in their coverage they grouped into a "Better" (significantly less promotional YoY) bucket. Barclays wrote in their research note, "Both core AE brand and aerie were "Better" during the quarter resulting in a "Better" grade of 96 for AEO. Recall, a 96 score suggests that AEO was "as or less promotional than LY" for 96% of the quarter. Core AE brand continuing to pull back on promotions is an important catalyst for the company and stock given it's still ~80% of sales results. We think aerie continues to gain share while the addition of more lounge should increase average unit retail mix." 

The stock may not be working the way we would have liked, but we are willing to give this plenty of time, because everything we are reading suggests that denim is making a major comeback and Aerie is still absolutely on fire. We still view AEO as a great way to play what could be a record back-to-school shopping season and we'll continue to average down our cost basis when we see fit.

We See Clearer Skies for Boeing

The second stock is Boeing (BA). It was reported Wednesday afternoon that a Boeing 737 MAX jet had departed the United States for China and it will undergo a flight test sometime next week. Shares of Boeing briefly traded about 1% higher in minutes, and then gave up all of those gains during a day when the market pulled back broadly. This means the news is not yet fully priced in, and aggressive news-driven traders can participate here. We may consider adding to some Boeing. It's very interesting, we have not added any BA shares ever since our initial purchase in the 250s.

A successful flight test won't get the jet certified immediately, but it represents a significant milestone and a major step forward in the approval process by Chinese regulators. It also should put Boeing on track to receive recertification before the end of the year, something CEO Dave Calhoun sounded adamant about Boeing's second-quarter earnings call.

China's aerospace industry is incredibly fast-growing and represents about one-quarter of the total industry's growth rate over the next decade, meaning a lot of orders will come into Boeing once the jet is cleared for the skies. We don't think BA is properly reacting to the increasing likelihood of approval, which we view as a major catalyst event that would send shares much higher from here.