Is Aeropostale a Buffett Stock?

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As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

Although Buffett's portfolio is probably too large to purchase a stake in Aeropostale (NYS: ARO) , we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Aeropostale meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Aeropostale's earnings and free cash flow history:

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Source: S&P Capital IQ.

Aeropostale has had fairly volatile earnings over the past several years. Of course, this is to be expected for an apparel retailer during an economic downturn.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

Aeropostale generates an enormous return on equity (29% over the past year, 50% on average over the past five years). It employs no debt.

3. Management
CEO Thomas Johnson has only been at the job since 2010, although he was chief operating officer for about six years prior to taking over the top spot and has held other important positions in the company for longer.

4. Business
Although it can be the beneficiary or victim of changing tastes and fads, apparel retail isn't susceptible to technological disruption.

The Foolish conclusion
So is Aeropostale a Buffett stock? Probably not, since the company's earnings have struggled a bit of late, and its CEO is fairly new to his position. However, it does exhibit some of the other quintessential characteristics of a Buffett stock: high returns on equity with limited or no debt and a technologically straightforward industry. To stay up to speed on Aeropostale's progress, simply add it to your stock watchlist. If you want to find out about one fast-growing retail stock our analysts love today, check out "The Motley Fool's Top Stock for 2012".

At the time this article was published Ilan Moscovitz doesn't own shares of any stock mentioned. The Motley Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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