Share price dropped, which could present a discount buying opportunity.
While other companies are plagued by slowing sales and slack demand amid a slowdown in the U.S. economy, discount retailer Big Lots (NYSE: BIG, Stock Forum) is benefiting in a big way from the frugal shift in consumer sensibilities. The company proved this fact on August 26, when it reported better-than-expected second-quarter earnings and guided higher for the third quarter and full year. The shares reacted negatively to the report, but this may offer a nice entry point for a long position on the equity.
Digging down on the fundamentals first, BIG posted a second-quarter profit of $26 million, or 32 cents per share. The consensus was expecting a profit of 27 cents per share. The report marked the fifth consecutive upside surprise for the company, which has topped Wall Street's views by an average of more than 35% during the past five reporting periods.
BIG did state that the current quarter could be troublesome, as it was not as focused on clothing as it could have been given the back-to-school retail season. Furthermore, the company noted that the timing of Thanksgiving would shorten the holiday shopping season. Despite these concerns, the company boosted its third-quarter earnings expectations to a range between 15 cents and 19 cents per share, with full-year earnings lifted to between $1.02 and $1.09 per share. Analysts were caught off guard, with forecasts of 17 cents per share and $1.03 per share, respectively.
Due to concerns revolving around the back-to-school and holiday shopping seasons, traders sent BIG shares sharply lower in a knee-jerk reaction. The stock quickly dropped more than 6% on August 26, but support at the 30 level held despite the onslaught of selling pressure. Furthermore, the shares also maintained support at their rising 20-week moving average. This trendline, in conjunction with its 10-week counterpart, has helped usher BIG more than 100% higher since the beginning of 2008. With key support just below the shares, and a long-term uptrend firmly in place, a rebound from the 20-week moving average should help reverse the post-earnings overreaction and help BIG resume its positive price action.
On the sentiment front, investors are attempting to call a top to BIG's strong technical uptrend. In the options pits, puts more than double calls among near-term options, as the stock's Schaeffer's put/call open interest ratio (SOIR) arrives at a reading of 2.37. What's more, this ratio ranks above 87% of all those taken during the past year, indicating that speculative options traders have been more negatively aligned only 13% of the time in the prior 52 weeks. An unwinding of this negativity could provide additional buying pressure for BIG shares.
Delving into the stock's open interest configuration, we find that more than 13,600 puts reside at the 30 strike in the September and October series of options. By comparison, near-term peak call open interest totals just 4,100 contracts at the 35 strike. This skew toward out-of-the-money put open interest indicates that investors are not looking for BIG to rally much higher, and has bullish implications for the shares from a contrarian standpoint.
Outside the options pits, short sellers have placed massive bets against BIG. During the most recent reporting period, the number of BIG shares sold short swelled by roughly 16.5% to 13.8 million shares. This heavy accumulation of short positions now represents a whopping 54% of the stock's total float and could provide ample fuel for a short-covering rally if BIG can resume its long-term uptrend along its 10-week and 20-week moving averages.
Finally, Wall Street is largely bullish toward BIG. According to Zacks, the company has garnered four "buys" and three "holds." However, there is still room for improvement in the form of upgrades from those lingering holdouts or additional analyst coverage. Such a development could provide additional buying pressure, helping BIG to extend its impressive year-to-date gain even further.
By Joseph Hargett
See More Articles by Joseph Hargett of SchaeffersResearch.com
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