A Discounter at a Discount

08/11/2006 12:00 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Joseph Sunderman and Beth Gaston Moon review the earnings season and also highlight an out-of-favor play in the closeout retail arena. Consistently successful at betting against the current market sentiment, their recommendation is worth a stroll through the aisles…


“Already more than four-fifths of the major Standard & Poor's companies have issued their second-quarter earnings, and there is no sign of the trend of double-digit earnings growth subsiding anytime soon, despite rising fuel costs and geopolitical uneasiness. S&P recently noted that corporate America has collectively posted a 13-percent increase in earnings growth, marking an unprecedented 17 consecutive quarters of double-digit growth. Not including the high-flying energy and finance sectors, however, earnings growth would have come in at 9.98 percent, just missing the double-digit threshold.


“In other data, 70% of companies have topped estimates, above the 60% that exceeded expectations, on average, since 1994. In fact, Thomson Financial noted that US companies haven't topped estimates by this large a margin since the first quarter of 2004.


Big Lots (BLI NYSE) could be the right stock for those concerned with recession or stagflation. If you didn't already know, BLI is engaged in retail of closeout merchandise in the United States. Things seem to be going right for this issue. On May 25th, the company reported first-quarter earnings from continuing operations of $0.13 per share. This exceeded the year-ago first-quarter figure of $0.07 per share and easily surpassed Wall Street's expectations of a nickel per share. On this news, the shares experienced a bullish gap and rallied from $13.51 to $16.31. Since May, the shares have been mired in a range between $15 and $17 with the ten-week and 20-week moving averages acting as support. We believe that a new fresh upleg is forthcoming on BLI.


“Beyond May's impressive earnings report, the company reported respectable July retail sales growth that came in at 5.7% vs. consensus estimates of 3.0%. Sentiment is clearly skeptical across several measures. First, the put/call open interest ratio stands at 0.75, or higher than all but 6% of readings for the past year. Second, there are only a handful of brokerage houses that track the shares. Of those five, only two recommend it as a "buy" and two actually rate the stock a "sell." Finally, the real driver behind this trade is the short interest. At nine times average daily volume and nearly 17% of the stock's float being held short, this stock has short-covering rally written all over it. Traders should target a move to 19.10 with a stop-loss on a trade below 16.29.”

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