Abercrombie: Buy signal or short squeeze? «

    Abercrombie: Buy signal or short squeeze?

    It is probably a little of both. Price popped up after Abercrombie /quotes/zigman/167627/delayed/quotes/nls/anf ANF -2.82% announced a positive revision in its forecast. There is a large short position , so the jump in price may be partly due to short-covering. But portfolio managers were hoping to see a bottom in this fundamentally strong company with a nice dividend. Price had dropped from $54 in June to a recent low of $31. If the train is leaving the station for a trip back up to $54, many portfolio managers will be running to catch that train and its implied 42% return from a $38 starting point.

    But not so fast. Is the bottom really in place at $31, or will there be a retest? Could this first move up be a false start fueled by panic short-covering? Will price fall back to fill the gap once the shorts have covered? When will the analysts reverse themselves and raise their targets and to what new levels? The consensus 12-month target is only $38, and price is already flirting with that level on the move up. Last August analysts were busy downgrading their targets from the $60s to the $40s. Are they now ready to reverse themselves from $40s back to the $60s? Probably not today.

    This positive surprise in the improving outlook for ANF probably means the bottom is in place. It also means that it will probably make one last attempt to retest the bottom or put in place a higher low above the bottom. By that time, the analysts and the portfolio managers will have their act together and will be ready to buy on weakness provided they can buy around $35 and see a target of $45 or better. If you put a 20 PE on the finviz.com forecasted earnings of $2.28, you will hit that 45 number. Bingo. And that $2.28 needs to be upgraded based on the latest guidance.

    Of course there are no guarantees on forecasted earnings. In fact, some fundamentalists refuse to use forecasted data. They will use historical data rather than forecasts to come up with their targets. They will buy ANF when it is undervalued and sell when it is overvalued based on actual data and not forecasted data. That is what bottom fishing is all about. A bottom holds when the market is convinced that a stock is undervalued and needs to be bought. Value players create the bottom when they start buying ANF because it is under valued in their calculations. We see this bottom form on the chart. The bottom fishers were buying at $31 and now we have those buyers coming in because they see forecasts improving and expect analysts will be upping their targets.

    Of course, we will be the last to hear that the analysts are moving their targets back up to, say, $55, but that’s ok. We can follow the smart money on the charts and listen to what the hedge-fund managers are doing. They may have the knowledge before us, but they can’t hide the moves they are making based on that knowledge. We will know whether the portfolio managers start buying here or at $35 or at $40. Here is a chart showing some of them on stockcharts.com