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If You Own Ollie’s Bargain Outlet (OLLI) Stock, Should You Sell It Now?

Alex Smith
·4 min read

Steel City Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. During the third quarter of 2020, the fund returned 1.6% net of fees, while the S&P 500 Index was up 8.5%. You should check out Steel City Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Steel City Capital highlighted a few stocks and Ollie's Bargain Outlet Holdings Inc. (NASDAQ:OLLI) is one of them. Ollie's Bargain Outlet Holdings Inc. (NASDAQ:OLLI) is a discount store company. Year-to-date, Ollie's Bargain Outlet Holdings Inc. (NASDAQ:OLLI) stock gained 41.1% and on October 27th it had a closing price of $92.14. Here is what Steel City Capital said:

"Ollie’s Bargain Outlet (Short): OLLI delivered a blowout second quarter – same store sales were up 43.3% and overall sales were up 58.5%, operating income tripled, and the company generated more than $160 million of free cash flow. Current conventional wisdom is the company’s position as a bargain retailer in the middle of a recession should support improving financial performance and thus its stock price. But in reality, shares are down nearly 15% since the company reported second quarter results. What gives?

Underpinning OLLI’s robust cash generation was strong sell through of existing inventory. At the end of the second quarter, inventory sat at ~$895,000 per store, more than 10% below the company’s three-year average of approximately $1,000,000 per store. At first blush, declining inventory would seem like a positive, particularly given my prior contention that OLLI was over-inventoried late last year. But today, the pendulum has swung too far in the opposite direction. With sales on track to grow at a mid-teens clip in the third quarter, I anticipate store-level inventory metrics will further deteriorate.

Absent the ability to quickly restock – which is challenging given the current speed of the treadmill – OLLI will likely struggle to maintain positive comps over the next several quarters and will face particular challenges in 2Q and 3Q of FY’2021. OLLI currently trades at 31x next year’s earnings, in-line with the company’s 3- and 5-year averages, which I believe makes for an attractive short position given the fundamental outlook."

Most Consumed Products in the World
Most Consumed Products in the World

Nejron Photo/Shutterstock.com

In Q2 2020, the number of bullish hedge fund positions on Ollie's Bargain Outlet Holdings Inc. (NASDAQ:OLLI) stock increased by about 26% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Ollie's Bargain Outlet's growth potential. Our calculations showed that Ollie's Bargain Outlet Holdings Inc. (NASDAQ:OLLI) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.