Lovesac: A Small-Cap Stock with Huge Potential Upside

Lovesac announced distribution agreement with Best Buy in November 2020

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The Lovesac Company (NASDAQ:LOVE) is an American specialty furniture brand with 91 retail showrooms to support its ecommerce delivery model. You've probably seen the ads; the majority of Lovesac’s current sales are derived from its trademark platform called “sactionals”, a washable, changeable, and reconfigurable replacement for the standard couch or sectional. In November of this year, Lovesac announced that its products would be launching on Best Buy’s (BBY) websites, advancing the company’s online presence significantly while also increasing its exposure to a brand new pool of potential customers.

In 2020, Lovesac stock has nearly tripled in value. Since breaching the $4 level back on April 2, LOVE has carved out a channel of higher highs, with the most recent run to its Dec. 22 annual high of $45.85 spring-boarded by its 160-day moving average. December's sizable 39% gain can also be attributed to a Dec.9 post-earnings bull gap of 19.5%.

LOVE Stock Chart

A short squeeze could keep the wind at the equity's back. Short interest increased by 15.5% in the two most recent reporting periods, and the 3.21 million shares sold short accounts for a whopping 29.3% of LOVE's total available float. At the stock's average pace of trading, it would take shorts almost two full weeks to buy back their bearish bets.

Traders looking to speculate on LOVE's near-term trajectory should consider options. The stock's Schaeffer's Volatility Index (SVI) of 84% is in just the 4th percentile of its annual range, suggesting short-term options are pricing in relatively low volatility expectations for the shares. In other words, Wingstop's near-term options are attractively priced at the moment.

Lovesac looks to be reaching a stage where it can expect to be profitable on a more consistent basis. In 2020, Lovesac reduced its net losses by more than $13 million while simultaneously increasing its annual revenue by approximately $50 million. Lovesac has nearly quadrupled its revenue since 2017, generating sales of about $283 million in the past 12 months.  Furthermore, the company is innovating in a largely unchanged industry, which is what investors should be seeking in a search for solid growth stocks. With a market cap of $650 million, Lovesac remains a small-cap company with a significant amount of upside potential. 

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