When investors look ahead to what may be great investments for the next year, they much too often focus on what were big winners from the previous year. For example, shares of Google (GOOG) more than doubled in price during 2005. So, quite naturally, Google gets a lot of attention these days as a good investment choice.
But investing in what's currently popular isn't usually the most profitable move. The big winners in the future are much more likely to be stocks that are unpopular right now but happen to represent ownership in great businesses.
One such business may be American Eagle Outfitters (AEOS). American Eagle caters to teenage shoppers who tend to change preferences in clothing retailers based on which way the wind is blowing.
The stock is down about 30% in the last five months. However, American Eagle happens to be a very good business that can be bought at a bargain price. A high return on capital virtually guarantees that a business is a good one. And American Eagle certain qualifies on that count. By my calculations, its return on capital (earnings before interest and taxes divided by net working capital and net fixed assets) is 48%.
And shares of American Eagle can be bought at a bargain price right now. Its earnings yield (earnings before interest and taxes divided by enterprise value) appears to be about 17%.
A good company at a cheap price. That's a combination that makes money for patient investors. American Eagle may be flying low right now. But look for the eagle to soar again.
This article is for education purposes only and should not be considered to be investment advice.
(C) Larry Holmes
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