A Bargain Name Becomes a Bargain Idea

By: Keith Kaplan

Apr 19, 2021 | Investing StrategiesNews

There’s no shortage of noise flying around the markets today.

Bitcoin fell back under $54,000. Coca-Cola earnings emerged this morning.

Tesla. Goldman. Morgan. Alibaba. They’re all making headlines today.

Oh, and one more thing to worry about, the government now says that Peloton treadmills are dangerous.

But for me, there’s nothing more dangerous than noise.

I can’t trade noise. I can’t invest in noise. I don’t want noise.

Neither should you.

All it does is cloud up our screens.

It can cloud up your mind and limit your ability to find actionable trade ideas.

What I want and need is a very clear signal.

One that allows me to invest with confidence and put my feet up after I finish a trade…

That’s exactly what came across my desk last Thursday with this “bargain idea.”

The U.S. Economy Looks Ready to Run

I’m sure you’re aware right now that everyone is hyper-bullish about the U.S. economy.

In March, Justice Clark Litle shared his insight on a developing period of dynamic economic growth.

Two weeks ago, JPMorgan head Jamie Dimon shared a very similar sentiment.

The expected economic growth is unlike anything we’ve seen in four decades.

The International Monetary Fund (IMF) projects that U.S. GDP will increase 6.4% this year. That would be the fastest level since 1984 (a period when the dollar ripped higher).

Now, the Federal Reserve Bank of Atlanta projects that first-quarter GDP came in at 6.2% and said that U.S. consumers would contribute more to the global recovery than China’s consumer class.

With pent-up consumer demand, a soaring savings rate, vibrant job growth, an accelerating recovery, and recent stimulus (with the prospect of more), the tailwinds are strong.

However, I keep seeing one unfortunate headline. I’m sure you’ve seen the same.

It’s the increasing expectation that inflation will hit the economy. In March, consumer prices increased by 2.6% year-over-year thanks partly to rising gasoline prices.

As you know, inflation cuts into purchasing power. That means you can buy less for the same money. Recently Goldman Sachs Group said that the companies that will succeed will be the ones that pass on an uptick in inflation to consumers.

With inflation in mind, I was interested to discover this reopening play when it passed into the Green Zone this week.

Not only does it address issues like inflation (wait until you see its business model), but it also does something that few retailers would ever think to do in an economy so reliant now on e-commerce.

Why This Name Hit the Green Screen

I’ll admit I didn’t know much about this retail firm when it entered the TradeStops Green Zone last Thursday.

I’ve been waiting for reopening stocks to cross my desk…

But I’ve only known Ollie’s Bargain Outlet Holdings (OLLI) as a sponsor at Baltimore Orioles games.

Fans can grab $5 tickets on “Ollie’s Bargain Night” – typically on a weekday night – when the crowd is relatively sparse.

You might need binoculars to see the plate from the discount seats, but Ollie’s has offered a cheap way to see a game for years. I’ve also seen its advertisements on the outfield wall and in occasional newspaper inserts.

So, what is Ollie’s Bargain Outlet Holdings?

Well, it could be one of the most absurd retail businesses that I’ve ever read about. Remember when I said this was a reopening trade?

I really mean it.

Because Ollie’s Bargain Outlet Holdings sells 100% of its products in retail stores.

It does not sell any products online.

Seriously.

In the era of Amazon and COVID-19, you’d have to be totally out of your mind to be completely engaged in physical retail. Yet here is Ollie’s with nearly 400 stores that sell everything at rock-bottom, bargain prices (upwards of 70% off typical retail prices).

The company’s business model feels a bit crazy.

It buys out excess inventory from other companies as closeout purchases.

You won’t find everything they sell in a Target, Walmart, or even Dollar General.

Ollie’s targets a 40% gross margin. Forbes notes that the company really doesn’t even care what it’s selling so long as it can meet those figures.

In one profile story about the company’s executives, there is an account of the fact that stores can’t keep Chefman air fryers on the shelves. Weighted blankets are always in high demand. Ollie’s sells branded hangers, boxes of cookbooks, air conditioners next to sunscreen, family games, fishing gear, and an alarming amount of pottery.

It also sells big brands. You can pick up Star Wars Mega Construx (a Lego competitor) down the aisle from Farberware, Yankee Candle, Clorox, and Wrangler.

It might feel like a fire sale every single day.

But even though its per-foot sales is about half of Target and a third of Walmart, the company still finds a way to be even more profitable.

In 2019, Ollie’s operating margin was north of 13%. By comparison, Walmart is about 4%.

Trading Ollie’s Bargain

Ollie’s first hit the Green Zone back on April 27, 2020, trading around $68. It’s one of the more volatile stocks with a VQ of about 33%.

Ever since it hit green, it’s been all over the place, even dipping down to the Yellow Zone (caution or hold area) many times.

We care greatly when we see stocks turn Green, take a breather in the Yellow Zone, then bounce back to the Green Zone, because we’re looking for positive momentum and confirmation our stock is moving upwards.

On Thursday, Ollie’s hit the Green Zone yet again after being Yellow. Once it hit the Green Zone, shares then popped by more than 5% over the final two days of the week.

This is definitely a company to watch, and it has quite an appealing thesis over the long term given investor optimism about the business model. 

But that’s not the full story on why I’m excited about this potential bargain-basement stock.

The April 15 Green Zone trigger date coincided with three different strategies highlighted by our Ideas by TradeSmith product. Today, it’s considered a member of the Value, Low Risk Runners, and Best of the Billionaires strategies.

That means our indicators have a LOT of conviction around Ollie’s right now.

We’re going to discuss each of these strategies and how they might relate to your risk tolerance and profit potential. But first, I’ll be back tomorrow with one final reopening stock that recently hit the Green Zone and delivered nice gains.

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