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Hot Topic Buyout Doesn’t Mean Deckers, Aeropostale Are Next

Hot Topic got lucky — other retailers won't


Teen retailer Hot Topic (NASDAQ:HOTT) is just the latest in a string of high-profile private equity buyouts, but that doesn’t mean the Joe Blow retail investor should bet on one saving him from a bad position.

Cough, Deckers Outdoors (NASDAQ:DECK), cough, Aeropostale (NYSE:ARO).

Hot Topic agreed to be acquired by private equity shop Sycamore Partners for about $600 million, capping a reasonably successful turnaround for the retailer.

The company snapped a three-year losing streak of declining revenue in 2012, and the stock rallied 46% for the year. Still, HOTT been a market laggard over the last 52 weeks, and even after the pop on the buyout news, shares still stand more than 50% below the all-time high hit way back in 2004.

It’s also been one hell of a volatile ride. Over the last three years, HOTT has swung in a range of about 80 percentage points.

Of course, it all depends on your own cost basis whether this buyout puts your position into the green, but it’s safe to say lots of long-term investors will lock in losses.

For example, anyone who bought and held Hot Topic in the five years between 2001 and 2006 is still likely to be looking at a loss — and that’s before factoring in inflation. (The really long-term investors who’ve held HOTT since the 1990s are looking at some nice returns — if they even remember that they own this stock.)

Either way, what’s done is done. HOTT is joining a growing list of companies that will be taken off the public markets, including H.J. Heinz (NYSE:HNZ), computer-maker Dell (NASDAQ:DELL) — if that deal goes through — and, according to reports on Friday, Compuware (NASDAQ:CPWR).

Unfortunately, as these things always do, the Hot Topic deal has Wall Street chattering about which apparel company could be next. But paying attention to such rumors is a good way for a retail investor to get burned.

Two of the most popular names surfacing in buyout speculations are Deckers and Aeropostale. Indeed, Randal Konik, an analyst at Jefferies, wrote in a note to clients that strong cash flows and potential for improving margins make these two beaten-down names compelling targets for private equity firms.

But you need a better reason than that to dive into these stocks. Don’t start a position in something just because you think you’ll get a takeout pop. It’s a crapshoot. Face it: Most retail investors in Hot Topic just got lucky.

Deckers, maker of Ugg boots, has been disappointing the Street with its revenue performance and forward guidance for at least a year. Sales have come up short of analysts’ average forecast for two consecutive quarters and three of the last four. Yes, earnings are coming in ahead of expectations, but only because the bar keeps getting set so very low.

Aeropostale, meanwhile, is stuck with stagnant same-store sales — a key measure of a retailer’s health — and is expected to report lower sales and a steep drop in earnings per share when it reports quarterly numbers next week.

There’s a reason why shares in Deckers and Aeropostale are both down roughly 30% over the past 52 weeks. True, Deckers has been on a tear over the last few months, rallying nearly 70% since Oct. 31. But that’s of little solace to anyone who didn’t time the plunge almost perfectly.

At the same time, the shorts are all over these stocks. More than 40% of Deckers’ float was sold short as of Feb. 15. And 10% of the float sold short for Aeropostale. There’s a lot of big money out there betting on further declines.

Yes, a private-equity bid or some unexpected good news could set off a squeeze and force stocks in either of these names higher. But that’s a gamble at best. It’s nothing to do with fundamentals. Betting on a PE takeout just ain’t investing.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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