Huge potential, still some variables- but here's how to cash in.
This is sort of a perspective on BIG, describing a profit opportunity that so many fail to see. This stock has something rare- a predictable pattern. That offers huge profit potential if you understand it. I've followed, tracked and studied it for six years and invested in the pattern for four. Three of those are past, and all were successful. The fourth is going on now.
Last year I netted $26,000 on my play with 3000 shares. However, there were family issues dominating my time and attention during that period. I both bought and sold late, so I could have done much better. This year, the parameters were so good and potential so high, I upped the stakes a great deal. I have a large position, backed up by options for an equally large position.
For those who wonder how this play works, it's simple. The pattern is one of earnings to share price correlation, and they run pretty much in parallel. Big's earnings are season-cyclical, so every year, the same thing happens. Look at the earnings chart for BIG on your brokerage account, then impose the price graph over it. Note that every year, the first three quarters are a progressive decline- and articles pop up bad-mouthing it; claiming the stock in going under. Sometimes it gets down-graded. The price keeps falling, and the cycle creates an annual low usually occurring between mid November and the end of December, around the 3Q earnings report. Then the attention turns to the 4Q, which is invariably a monster because Big Lots does so well in the holiday season. The price rises, big time. If they beat estimates- as they usually do, the high exceeds the previous year's high by about $3. By late April, the rise peaks and the cycle starts over.
This year, the spread between low and potential high is extreme. BIG adjusted both 3Q and 4Q earnings downward in the summer, and forecast a .24 loss for 3Q. However the 4Q, even with the downgrade, is forecast to be a record high, and the earnings estimates for BIG are exceptionally reliable or modest. The price dropped due to the projected loss (first I've ever seen) and improved the buy window. I was hoping for $25/26, but that didn't happen. The ideal buy range is still open, but on the upper end and will close any day. When the 3Q came in much better than expected, we had a 12% surge, which then got shot down by the insider trading probe. That is now obviously a general witch hunt as it's expanded to cover numerous companies and executives all the way up to GS. That removes some of the focus that originally was placed on Fishman, the retiring CEO, and removes some of it's effect on the share values. It was personal anyway, not corporate.
The cycle high is next. In the last three years, this has always fallen between mid March 15 and mid April. the highs were $41+ in 2010, $44.50 in 2011, and 47.21 in 2012. The potential high in April 2013 is $50. The potential spread right now is $28 to $50 or +$22 per share on the high side, and $28 to around $42 or $14 per share on the low side. In 4 months. Check the charts- this happens every year. The starting point is lower, the peak potential higher, producing a spread wider than ever before.
There are others factors that affect the potential: A couple that have good foundation and are probable is that the recently acquired Canadian division will swing to a profit in 4Q. Another is that the 4Q earnings may substantially beat the estimate, just as the recent 3Q did. Both of these can contribute to dramatic price rises. When the 3Q beat it's loss estimate by 14 cents on Dec 4, it gained 12% in one day. In 2011, the stock gained $7.50 in one week- 2/7 to 2/14. While there is no way to know how far it will go this year, the stock history shows BIG has the potential to cover a lot of ground fast during this part of the cycle. In 2011, it went from $29.50 to $44.50 in the same period.
There are other factors I class as baseless rumors which can influence people but which I have no reason to believe are true. Last year there was a buy out offer, which fizzled but for a while pushed the price up, and there has been some mention of that happening again. While BIG is definitely a buy-out target and the change in CEO might open some doors for it- the rumor is not true to my knowledge and there is no reason to think it's likely. There has also been some speculation that BIG might begin a dividend program, but again, I have nothing in my research to suggest that is anything more than someone's wild speculation, and it has no foundation at all. Both of those are non-reality issues, but any wise investor knows that regardless of what is true, the perception of the investing public has a great deal to do with the fortunes of a stock. It pays to be aware of the mood. In this case, the negative articles and short focus reports serve to depress the price of BIG, undervaluing it. Then the enthusiasm over the record earnings does the opposite, and overvalues it. The result: Opportunity. You have to be willing to apply the Buffett philosophy, to buy when others fear the worst, and sell when they expect the best.
Please note- I'm not trying to convince anyone to buy this stock. I'm just sharing the insight into an opportunity and strategy that has worked very well for me, and of course nobody is always right. Every investor should do their own research, and make their own decisions- no exceptions.