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Is Now the Perfect Big Lots, Inc. (BIG) Buying Opportunity?

Big Lots, Inc. (BIG) is poised to take a bounce off the round-number $50 level

Aug 30, 2016 at 3:28 PM
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A number of discount retail stocks have dropped on earnings recently. This was true even for Big Lots, Inc. (NYSE:BIG), despite its better-than-expected quarterly report last Friday. While the shares are down again today at $49.93, we have reason to believe the recent correction is more a buying opportunity than a sign to stay away.

For starters, BIG's recent losses are a drop in the bucket, compared to its longer-term gains. Year-to-date, the shares have advanced close to 30%. Not to mention, as recently as Aug. 15, the retail stock hit an all-time high of $56.30.

There may be reason to believe BIG will soon resume its quest for higher highs, too. For one, the stock could find round-number support around the $50 half-century level, home to its 2014-15 highs. For another, the shares are hovering near potential trendline support from their 100-day moving average, as well as a line connecting its 2016 lows.

big daily august 30

Adding to this potential supportive case is heavy put open interest in the front-month series residing at the 50 strike. Plus, according to data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly four times as many puts as calls during the last two weeks. The resultant put/call volume ratio of 3.80 sits in the bearishly skewed 73rd annual percentile.

On top of that, short-term open interest levels are very much tilted toward puts over calls. BIG's Schaeffer's put/call open interest ratio (SOIR) is 3.62 -- just 12 percentage points shy of a 12-month peak. This collective options-related pessimism could translate into tailwinds for the shares on an unwind situation.

Outside of options land, pessimism also prevails. One-third of BIG's float is sold short, representing three weeks' worth of pent-up buying power, at the stock's average daily volumes. In other words, the shares are ripe for a potential short-squeeze rally. And, last but not least, the majority of brokerage firms covering Big Lots, Inc. (NYSE:BIG) have doled out a tepid "hold" assessment. This leaves room for future upgrades, should the long-term outperformer rebound off the $50 area.

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