Short-Covering Begins In Big Lots

Why Did Big Lots Gain 12% Today? Short-Covering 

We were pleasantly surprised to see shares of Big Lots (NYSE: BIG) up 12% but could not understand why until we saw the short interest. The stock has been in a downtrend for some time driven by dwindling analysts' sentiment, fear of slowing sales, and an ever-growing short interest that reached lofty levels above 25% in the weeks ahead of the Q2 report. With the report still due out and the analysts still downgrading the stock, the only thing left to drive it higher is short covering and that makes us think this downtrend is over. The analysts have set the bar so low that Big Lots should easily outperform and even if it doesn't, trading at 5.8X its earnings and yielding 4.6% it’s a buy, in our book. Regardless of the reason, the shorts are starting to get scared and feel it's time to get out of the stock. 

The analysts ignored Big Lots for nearly two years and then came out with a series of downgrades and price target reductions in Q1 and Q2. The 8 current ratings, those less than 1 year old, all came out in that time and have the stock pegged at a very weak Hold verging on Sell with a price target only 10% above the recent price action. The latest commentary comes from Bank of America analyst Jason Haas who maintained an Underperform rating while cutting the price target. He cut the price target to $25 or below the current price action on an expectation for a BIG miss this reporting season. In his view, challenging weather conditions, tough comps, late Easter, and increased promotions will all cut into the results and drive shares lower. 

“Although management has done a good job improving the Big Lots concept, we’re concerned that these changes won’t be enough to offset a challenging macro environment,” he told clients. “In fact, many of the changes made over the past 5+ years have shifted BIG away from food & consumables and towards big ticket furniture making the company less defensive in a downturn.”

The Institutions Are Buying Big Lots 

As sour as the analysts are on Big Lots, the institutions are buying this cheap dividend growth stock. The activity in the YTD portion of 2022 is worth a net 5.1% of the market cap and has total institutional holdings up to nearly 95%. This is a very significant factor for share prices and should put a floor in the market assuming the results are not too far off the consensus. Add in the fact the short interest was running at 26%, this could lead to a very sharp short-covering rally if not a short-squeeze. The risk, of course, is that results will be worse than expected which may lead to institutional selling. 

Looking at the numbers, Big Lots should not have a bad quarter in terms of sales. The analysts are expecting sequential and YOY decline but that is both seasonal and expected given last year’s unnatural strength. In regards to the 2020 and prepandemic comps, the analysts are expecting flat and up 12% which we view as very positive. The risk is in the earnings, the analysts are expecting only $1.00 compared to last year’s $2.62 and $1.26 in 2020 but we view it as an upside risk.

The Technical Outlook: Big Lots Might Be At The Bottom 

Shares of Big Lots might be at the bottom but we’ve seen short-covering rallies like this before in this market. If the results are good and the market follows through on the move we’ll start to be more bullish. Until then we view this as a relief rally within a bear market and one that may hit resistance a the short-term moving average.