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3 Small Caps That Are Ready to Rebound

In what could be a weaker year for most small caps, investors might be best served by looking at 2013's laggards.

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Small Caps to Buy #1: Aeropostale (ARO)

small-cap-stocks-to-buy-aro-stockIn December, I looked at the trio of teen retailers that includes Aeropostale (ARO), Abercrombie & Fitch (ANF) and American Eagle (AEO).

While I came to the conclusion that AEO has the best business of the bunch, I was confident that an experienced CEO like Aeropostale’s Tom Johnson would be able to return it to profitability in 2014. Considering ARO stock lost 30% in 2013, there’s plenty of repair work ahead.

In recent days, rumors have been flowing that private equity is getting a sniff of its business. Aeropostale tried to sell itself once before in 2011 to no avail. This time, influential investors like Crescendo Partners, Sycamore Partners and Eminence Capital are along for the ride. Johnson’s trying to update its fashion while trimming the underperforming stores. Crescendo believes ARO shares are worth $14 to $16 (vs. current prices under $8). I totally agree.

One of two things happens in 2014: Aeropostale is sold to a strategic buyer (but more likely private equity), or Tom Johnson gets the engine restarted and it gets off the schneid.

Either way, ARO stock could be due for big gains. It’s a gamble I’d be willing to take.

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