The Short-Story On Second Quarter Earnings
The second-quarter earnings cycle got started with a boom and now its ending with a bust. When the cycle started and it became apparent the consensus figures were too low, the market breathed a sigh of relief. When it became clear that most stocks would at least weather the storm, and some thrive, the market cheered. The problem now is that, way at the end of the cycle, so many companies have smashed consensus the expectation for strong earnings is baked into the cake. And the shorts are having a field day with it.
The short-interest in some of the most-interesting post-pandemic plays is in the high double-digits. More than enough to depress share prices when the market is already primed to take profits. The opportunity for investors is two-fold. On the one hand, share prices offer a value, often a deep-value, over comparable stocks. On the other, high short-interest will fuel a sharp short-covering rally in these beaten-up names once the bulls regain control.
Big Lots In The Final Innings Of Turnaround
The short-interest on Big Lots (NYSE:) is over 20% and not the highest on this list. The stock itself is in a near-term downtrend post-earnings, despite a stellar , and providing a deep-value relative to other retailers.
With shares trading at only 8X next year’s earnings, there is an opportunity for serious multiple expansion. What could drive a multiple expansion you ask? Big Lots is in the final stages of a major turnaround effort it calls Operation North Star. The plans, aided by the pandemic, have the company on track for sustained growth over the long-term.
Big Lots is also a dividend payer, like the others on this list, and provides an attractive return on top of its value. With shares trading at $46 the yield is about 2.5% and well above the broad market average. Based on the earnings, the balance sheet improvements, and the company’s history there is an expectation for distribution increases as well.
The Michaels Companies, Buy The Dip In This One
The short-interest in The Michaels Companies (NASDAQ:) is just over 35%. That’s a lot of shares, more than enough to ensure a nice big pop once short-covering begins in earnest. And it may already have started. Price action fell under the weight of short-selling, more than 24% at the low, but buyers are already stepping in at key levels.
Michaels doesn’t pay a dividend but it does offer a deep value relative to other retailers. The stock is trading about 7X earnings and the consensus figures are too low. The 2nd quarter were strong enough by themselves to bring the FY consensus into doubt and that could lead to analysts upgrades. Longer-term, the holiday season, a strong economic rebound, and Michaels’s eCommerce business are going to drive share prices higher.
Macy’s, The Updraft Has Just Begun
Share’s of Macy’s Inc (NYSE:) have been under more pressure than most retailers for many reasons. It’s a department store, it’s dependent on malls, the malls were closed for a while, and that’s all on top of an already declining brick and mortar retail sector. Which is why the short-interest in this stock is over 41%. But it won’t be for long. The second-quarter were, you guessed it, much better than expected and share prices are already responding.
What many analysts, and shorts, failed to consider is the company’s eCommerce presence was already well established and shoppers flocked to it. Not only did the segment grow 53% YoY it accounted for 54% of total sales proving the company’s place in the post-pandemic digital world. Inventories were down 29% at the end of the quarter, another bonus, leaving the company in a lean position going into the holidays. Perfect timing for new fashions and products.
Shares of Macy’s are up more than 10% the day after the report. A quick test of support at the short-term moving average resulted in a bounce that broke the stock above resistance. Now, with the indicators in support and short-interest to drive it, share prices will likely move up to the $9 and $10 level in the near-term.