3 Small-Cap Retail Stocks With Room to Run

Dillard's, Rent-A-Center, and Select Comfort stocks have recently touched new highs

Jul 31, 2017 at 1:41 PM
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The Russell 2000 Index (RUT) has ascended to record highs recently, and "the small-cap sector taking a leadership role would not be out of the question going forward," according to recent analysis from Schaeffer's Senior Equity Analyst Joe Bell, CMT. Against this backdrop, we crunched the numbers, and among the list of small-cap stocks that could have room to run are three retailers: Dillard's, Inc. (NYSE:DDS), Rent-A-Center Inc (NASDAQ:RCII), and Select Comfort Corp. (NASDAQ:SCSS). Below, we'll explain why we're watching shares of DDS, RCII, and SCSS, and which stock's options could be a bargain for short-term buyers.

To populate our list of small-cap stocks -- which we defined as stocks with a market cap of under $2 billion -- Schaeffer's Senior Quantitative Analyst Rocky White looked for stocks that met the following criteria: trade at least a million shares a day; trade above $7; have rallied at least 6.9% in 2017 (the same as the RUT); have at least 10% of float dedicated to short interest; and sport less than 50% "buy" ratings from analysts. DDS, RCII, and SCSS stocks made the cut.

Dillard's Stock Surrounded By Skeptics

Since touching a five-year low of $45.51 after earnings in May, the shares of Dillard's have rebounded roughly 65% in short order, touching an annual high of $83.44 earlier today. However, DDS stock has since dropped 5.1% to trade at $74.81, as activist investor Snow Park Capital Partners said the department store "may not be getting the highest and best use for some or all" of its real estate properties.

DDS stock's 14-day Relative Strength Index (RSI) hit an overbought reading of 82 on Friday, suggesting today's pullback may have been in the cards. However, a continued short squeeze could push Dillard's shares even higher. Short interest dropped by 13.7% during the past reporting period, but still represents more than three-quarters of DDS' total available float. At the stock's average daily trading volume, it would take about two weeks to buy back these shorted shares.

Further, not one of the four analysts following Dillard's stock offers up a "buy" rating. A round of upgrades in the wake of DDS' rally, or a stronger-than-expected earnings showing next week, could also add fuel to the stock's fire.

Activists Also Circling Rent-A-Center 

Activists have also been heavily involved with Rent-A-Center. Earlier this month, Engaged Capital said the company's board "should be fully exploring all strategic options," after the rental retailer rejected a $15-per-share buyout bid from Vintage Capital Management. Last week, meanwhile, Marcato Capital Management demanded the firm begin a strategic review, or else face the risk of a board shake-up.

Amid the brouhaha, RCII stock has surged 18% year-to-date, and last week peaked at $13.43 -- topping its early June annual high -- after the firm reported second-quarter earnings. The shares were last seen fractionally higher at $13.21.

As with DDS, Rent-A-Center stock remains surrounded by skepticism. Short interest represents nearly 38% of RCII's total available float, and would take about nine days to buy back, at the equity's average pace of trading. Further, five out of eight analysts maintain "hold" or "strong sell" opinions. A mass exodus of bears, or a buyout offer above Vintage's aforementioned bid, could help RCII stock extend its upward momentum.

SCSS Stock Has Exceeded Options Traders' Volatility Expectations

Select Comfort stock has surged 49% in 2017, but was last seen trading 0.2% lower at $33.61. The shares enjoyed a major bull gap in mid-April, thanks to a stellar earnings report, and ultimately touched a record high of $36.74 in late June, barreling past former resistance in the $35 area. Earlier this month, Select Comfort stock also ended higher the day after earnings, reversing an initial negative reaction.

SCSS short sellers have been hitting the bricks, but there's still plenty of sideline cash left to unwind. Short interest dropped 19.6% during the past two reporting periods, yet 13.5% of Select Comfort stock's float is dedicated to short interest -- representing more than a week's worth of pent-up buying demand, at SCSS' average pace of trading. Plus, six out of eight analysts following Select Comfort shares maintain "hold" or "strong sell" opinions, leaving the door wide open for potential upgrades to push the stock to even higher highs.

Options traders expecting more short-term gains for SCSS stock can pick up contracts at a relative bargain. The equity's Schaeffer's Volatility Index (SVI) of 37% is higher than just 8% of all other readings from the past year, suggesting SCSS' near-term options are attractively priced, from a historical volatility standpoint. Plus, Select Comfort stock sports a Schaeffer's Volatility Scorecard (SVS) of 91, indicating the shares have exceeded options traders' volatility expectations in the past year.

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