So, question of the day: Is the US economy really headed for that fabled V-shaped recovery? Or might we actually see something far more lazy – say, a Nike swoosh with a palsied upstroke?
That answer ultimately will say everything about the direction of retail in general and Big Lots (BIG) in particular.
In the wake of the ongoing Covid crisis, Big Lots has proven that it’s something of a retailing superstar. While bankruptcy has become the drug du jour for so much of the retailing industry, Big Lots enjoys a natural high, up four-fold since its time in the cellar in the early days of Covid’s American emergence back in March.
For that reason, Big Lots sits in fourth position among the Street’s best momentum stocks these days, based on EEON’s momentum-scoring algorithm. By far, it’s the best retailing stock, though it certainly has competition from Overstock (OSTK), Dollar General (DG), and Target (TGT). Arguably, though, Big Lots represents a better opportunity. But we’ll return to that in a moment.
First, what does it say that those particular retailers are king of the consumer hill? Obviously it says US consumers are A) financially distraught and, B) unable to kick their spending addiction.
On point A: Discount retailers booming tells you that consumers are conscious of the fact that they have to bargain hunt right now to stretch their limited dollars as far as possible.
On point B: Logically it makes little sense for consumers to spend as madly as they have been when so many have lost jobs. The off-the-charts retail-spending data in recent months – record retail-sales increases amid epic joblessness – is proof that Americans can’t keep their wallets closed, even in a crisis. Of course, this spending binge wouldn’t exist if not for the largesse of Congress and the $600 a week it was dispensing like a broken ATM – cash that largely flowed not into rent, mortgage payments, or car notes but, instead, into consumer items.
Which gets us back to Big Lots and that initial question about the shape of the recovery.
If you’re in the V-shape camp, then now’s probably the time to either claim your profits in Big Lots or short the shares. A return to economic normalcy means Big Lots likely returns to a downtrend the stock was experiencing long before Covid was an economy-collapsing critter.
When the economy swaddled investors in decent growth and low unemployment, Big Lots had little purpose. Consumers were pursuing aspirational desires, not value-mandated spending.
If, however, you recognize that a palsied Nike swoosh is probably our path forward for the next several quarters, maybe even the next few years, then Big Lots is the horse you still want to bet on.
Chances are better than even that Congress has a lot more stimulus money to throw around. Otherwise, lawmakers risk a monumental – and totally avoidable – economic catastrophe. Even certain, stubborn Republicans seem to recognize that now.
All those additional dollars headed to consumers ... well, that’s just added fuel to power Big Lots’ continued momentum.
Beyond momentum, however, Big Lots ranks decently high in terms of growth and profitability, but it ranks exceptionally high in terms of value – 98 on a 100 scale – because of its low price-to-sales and price-to-book ratios, as well as a dividend yield exceeding 3%, well ahead of the overall market. Few of its discount competitors look nearly as attractive.
Frankly, a value-oriented momentum play is about as good as an investor can hope for these days.