Depending on the source, retail same-store sales were up between 5% and 6% in September. That’s great news in a trying economy. Two retail stocks not reporting their monthly results are Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO), both of whom stopped the industry ritual earlier this year. Investors won’t know how they’re faring until mid-November when they report third-quarter earnings. Let me save you the wait and recommend you sell Abercrombie & Fitch to buy American Eagle Outfitters. Here’s why:

Insider Buying

Fund manager Peter Lynch didn’t read much into insider selling. He believed insiders sold for all kinds of reasons, many of which had nothing to do with the stock price. Lynch felt insider buying, on the other hand, had everything to do with price. They were buying for one reason and one reason only — the stock was cheap.

In 2011, American Eagle insiders have bought more than 1.1 million shares at an average price of $11.15, while they’ve sold 13,000 shares at an average of $15.65 a share, good for a net purchase of $12.44 million. Abercrombie insiders have made no stock purchases in 2011 but have sold 1.1 million shares at an average price of $64.44 per share. Most of the transactions were by CEO Michael Jefferies, age 66, so it’s likely much of it was for estate planning. Nonetheless, this sends a strong signal that Jefferies and the rest of the ANF insiders don’t see their stock as a bargain, or they would have been buying.

E-Commerce

According to Internet Retailer magazine, Abercrombie and American Eagle are neck-and-neck in the pursuit of online sales, ranking 56th and 57th, respectively, on its 2010 list of the top 500 Internet retailers. In fact, their online sales were within $9 million of each other, with Abercrombie edging out American Eagle with $353 million.

However, in my opinion, American Eagle is doing a better job with its e-commerce strategy — and apparently, I’m not the only one who feels this way. According to social commerce technology company 8thBridge, 10 companies from the Internet Retailer 500 are doing an especially good job winning business through social media. One of those companies is American Eagle, ranked ninth out of the 150 to 200 companies used to develop its Social Commerce IQ for retail.

In 2010, American Eagle’s Internet and catalog sales represented 11.6% of its overall revenue compared to 10.2% for Abercrombie. Given American Eagle ships to more than 62 countries while Abercrombie doesn’t ship outside of the U.S. — combined with American Eagle’s winning formula for reaching its customers — the gap is bound to widen. Higher Internet sales usually translate into higher profits.

Valuation

As I mentioned previously, the CEO’s actions in 2011 speak louder than words. Abercrombie is fully valued at $64.54, and American Eagle is undervalued at $12.05.

Why do I feel this way? Abercrombie’s enterprise value is 8.6 times EBITDA compared to 4.2 times for American Eagle. I’ve always liked this valuation metric because its combines all three financial statements (income, balance sheet and cash flow), giving investors a quick snapshot of a stock’s relative value. By this metric at least, Abercrombie is twice as expensive.

Another valuation metric I like is the Graham Number, which is the square root of 22.5 multiplied by the trailing 12-month earnings per share and the book value per share in the most recent quarter. The product of these three numbers is the fair value of a stock. According to the Graham Number, Abercrombie’s fair value is $32.77, approximately 50.8% of its current price, compared to $11.58 for American Eagle, which is 96.1% of its current price. This metric suggests both are theoretically worth less than current prices, Abercrombie far more so.

Lastly, I cooked up my own valuation metric in an effort to speed up the process for screening stocks. I take the P/E, P/B, P/S and P/CF and multiply them together. Generally, I won’t continue researching a company if the product is more than 500. Abercrombie is 1,747 while American Eagle is 169. Now, it’s only a metric, but it does a good job highlighting just how expensive Abercrombie’s stock is. Value investors had best avoid.

Bottom Line

As far as I’m concerned, I could have stopped after the second paragraph and successfully made my argument. The choice is obvious. Buy the Eagle, and drop A&F.

As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.