Buy the BIG Move in Big Lots? Here’s What the Institutional Investors Have to Say.

Josh Enomoto - Barchart - Wed Aug 30, 2023

With brewing headwinds posing concerns about the ongoing viability of the consumer economy, discount retailer Big Lots (BIG) posted stronger-than-expected results for its second quarter. Naturally, that shock result invigorated Wall Street, leading to BIG stock moving up nearly 27% to close out the Tuesday session. Also, sentiment continued to be positive in the afterhours session, facilitating a lift of 1.63%.

Given the immediate context, it wasn’t surprising that BIG stock saw significant movement in Barchart’s screener for unusual stock options volume. However, those intrigued by the speculative opportunity must climb a wall of worry. For one thing, the Barchart Technical Opinion indicator pegs BIG as an 88% sell. Specifically, it points to negative readings for both short term and long-term indicators.

Another serious point of concern for those wishing to gamble on BIG stock is the Street’s consensus view of BIG stock, which is moderate sell. This assessment breaks down as four holds, one moderate sell and three strong sells. Also, the mean price target among the market experts sits at $5.47, well below the open market price of $7.96. Even the high-side target only comes in at $6.

But what presents the biggest wrinkle for BIG stock is institutional trading. It’s not exactly rushing to join the long-side speculators.

BIG Stock Moves on Earnings But Faces an Options Test

According to an AP report, Big Lots reported a loss of $249.8 million in its fiscal Q2, translating to a loss per share of $8.56. Adjusted for pretax expenses and non-recurring costs, the loss came out to $3.24 per share. On the top line, the retailer rang up sales of $1.14 billion. Both stats beat their consensus targets of a loss of $4.15 per share and revenue of $1.1 billion.

However, the unusual options screener presented a hint that the smart money wasn’t exactly enthralled with BIG stock. Specifically, total volume hit 19,089 contracts against open interest of 75,415. Further, the delta between the Tuesday session volume and the trailing one-month average metric came out to 499.15%.

Breaking down the transactional data, call volume came out to 7,765 contracts while put volume hit 11,324 contracts. This pairing yielded a put/call volume ratio of 1.46, which outside of other context implies a bearish framework. Also, the put/call open interest ratio is 1.18, somewhat confirming the pessimistic overhang.

To be clear, the aforementioned ratio isn’t enough to absolutely determine intent among traders. To get a nuanced insight, Fintel’s options flow screener – which filters for only big block trades likely made by institutions – offers an invaluable resource.

Here, we find that while some traders are bullish – volume of 1,263 contracts for selling $5 puts with an expiration date of Oct. 20, 2023 – the overwhelming emphasis centers on bearish tactics. For example, the buying of $7.50 puts on Tuesday with an expiration date of Sept. 15 features volume of 5,205 contracts.

As for the Oct. 20 expiration date, institutional traders sold $7.50 calls on Aug. 22, leading to volume of 2,152 contracts. Whether we’re talking about pre-earnings or post-earnings action, the bears continue to dominate proceedings.

Fundamentals Present High Risks

In fairness, if BIG stock can pull off a substantive recovery, the reward could be stratospheric. For example, the average price-to-book ratio for the retail (general) sector stands at 5.45X. In sharp contrast, Barchart points out that BIG trades at 0.32X book, which on paper is incredibly cheap. Also, it trades at only 0.03X trailing-year revenue. That’s just subterranean.

However, using data from Barchart content partner StockStory, there may be a reason why BIG stock is so darn cheap. Since the final quarter of 2020, the retailer’s revenue trend – aside from the occasional peak higher – has been trending downward. So yes, BIG is a “bargain” but the discount is largely a product of the security’s rapidly falling price tag as investors are skeptical that the company can resonate with customers.

Even management acknowledged the steep challenges ahead. “Our results for Q2 illustrate that we remain in a very challenging environment, in which our core lower-income customer remains under significant pressure and has limited capacity for higher-ticket discretionary purchases,” said in part Big Lots President and CEO Bruce Thorn.

For broader context, Thorn framed the discussion positively, focusing on certain sequential improvements in the quarter. Nevertheless, as the consumer economy weakens amid pressure points like record credit card, embattled retailers like Big Lots face serious questions.

Even with today’s massive swing higher, BIG stock dropped more than 46% of equity value. With institutional traders apparently not moved by the Q2 results, retail buyers should probably just stay away.

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.