This trendy retailer looks like a risky momentum play

Back in August, I discussed my amazement at the performance of shares of Abercrombie & Fitch (ANF). The stock just didn't seem to reflect the fundamentals of the company's business. Well, my amazement continues, because shares of the retailer are up 9% on Friday on the latest earnings report -a report that did not impress me.

For the third quarter, Abercrombie made, on a reported basis, 44 cents per diluted share compared to 72 cents per diluted share in the year-ago period. After adjustments, earnings came in at 30 cents per share. Okay, that profit drop is bad enough, but wait till I get to the really bad stuff --revenues. Total sales declined 15%, but same-store sales were even worse: They plunged off the proverbial cliff, falling 22%.

I can't be the only one thinking that today's bid is not in step with rational thought, but it sure feels that way. Maybe I have to soften my view and go with the tape. After all, according to Reuters, Abercrombie & Fitch surpassed expectations by a wide margin and an analyst pointed out something that makes sense: The company probably will have a good chance of posting results pleasing to Wall Street since comparisons will become more attractive as time goes on.

Then why do I still sense danger with Abercrombie's stock? Quite frankly, I've been sensing danger for most of 2009. I've incurred many opportunity costs by ignoring the rising market. As frustrating as that is, I'd rather suffer an opportunity cost than a real loss.

Abercrombie hit a new 52-week high today, and it looks like it will be heading higher. If you've got the stomach for risk, you could make this a momentum play. Like they say, going with what's working is often times the best advice for traders.

Be sure, though, that you are at least reasonably confident that the holiday season won't be a total disaster. Chains such as Kohl's (KSS), American Eagle Outfitters (AEO), and Gap (GPS) will all be viciously competing for consumer traffic. It's bound to get financially tough for a lot of these retailers.

Disclosure: Steven Mallas does not own shares in any company mentioned; positions can change without notice.


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