Yesterday I purchased Aeropostale (ARO) for $17.60 per share. Here’s a look at ARO’s last 10 years of owner earnings (free cash flow):

The future is never very predictable for a teen retailer, but Aeropostale stock is priced as if the above line is never going to grow again. Yet ARO earnings have continued to grow during the recession. Using my Kelly Formula Growth Optimization Spreadsheet, I place 5% of my portfolio into ARO.

Other stock metrics I follow:

ROIC =31%
Profit Margin = 9%
FCF Yield = 15%
Price/Peak Earnings = 5.3

These are best-in-class in the teen retail segment.

ARO stock has been crushed over the past year on concerns over poor same store sales and rising commodity prices. However, at today’s prices, the company is trading at prices that imply their brand is going into permanent decline. ARO generates tremendous cash flow and management is buying back shares. The retail sector has seen tons of interest from private equity lately, and ARO is trading for a huge discount to the valuations similar companies like J. Crew were purchased for. If either ARO can show signs of growing again, the stock price should have a long way to run.

Timing of Purchase:
ARO stock price just completed a 9-week Buy Setup (see cell L480 in image below), which should make for an excellent entry point. Technically I should wait until the Buy Setup phase completes a ‘flip’ in the other direction, but 9 weeks is the minimum for a Setup so I’m happy to enter here.