Ollie’s Bargain Outlet (OLLI) Could Make For a Solid Contrarian Investment

On surface level, Ollie’s Bargain Outlet (OLLI) seems a reasonable venture to bet on. Currently, the economy is struggling for sustained traction as it recovers from the trifecta of the COVID-19 pandemic, geopolitical flashpoints and blistering inflation. Naturally, everyday households struggle to make ends meet. Ollie’s can help through its discount retailer business. Sure enough, OLLI stock represents an outperformer this year.

However, major concerns exist that the above framework isn’t sustainable. While OLLI stock may be besting many other publicly traded securities, it hasn’t been a convincing enterprise when it comes to delivering the financial goods. In fact, Zacks mentioned in early February that Ollie’s Bargain represents the bear of the day. Ironically, Ollie’s provides no bargain for investors, especially with shares priced at a forward multiple of 24.

Adding to concerns, the discount retailer delivered a poor earnings report for its most recent fiscal third quarter, missing analysts’ consensus target for the top and bottom lines. Specifically, Ollie’s adjusted earnings per share came out to 37 cents, below the 41-cent target experts predicted. Net sales reached $418.1 million, slipping beneath the consensus estimate of $431 million.

Looking at the financials, it’s difficult not to have some concerns about the valuation. For instance, the market prices OLLI stock at a trailing multiple of 37.87, well above the sector median of 16.45%. Indeed, Gurufocus.com warns that OLLI ranks worse than 82.4% of the competition.

If that wasn’t enough pressure, OLLI stock represented one of the dubious highlights under Barchart.com’s unusual stock options volume screener. Following the close of the March 2 session, total volume reached 4,195 contracts against an open interest reading of 10,572. Further, the delta between the Thursday session volume and the trailing one-month volume came out to 948.75%.

Drilling into the details, call volume hit 1,071 contracts. However, put volume jumped to 3,124 contracts, resulting in a put/call volume ratio of 2.92. Mathematically, this framework favors the bears. Still, bold contrarians may want to consider taking the opposite side of the trade.

Hurting Consumers Cynically Benefit OLLI Stock

While it’s rarely a feel-good moment to profit from others’ pain, when it comes to Ollie’s Bargain Outlet, an exception can be made. Late last year, a local news report from Upstate New York mentioned that consumers enjoyed shopping at discount retailers like Ollie’s, stating it made searching for holiday gifts easier.

Essentially, with skyrocketing inflation taking a massive bite out of consumers’ paychecks, they were no longer willing to pay full price for discretionary items like books and toys. Therefore, Ollie’s offers a mechanism for families to enjoy the holidays while saving critical funds. Indeed, OLLI stock may be one of the few holistically celebrated public businesses.

Additionally, it may be a while before consumers recover. For instance, with geopolitics still rearing its ugly head, painful consequences such as food supply chain disruptions can wreak havoc on pricing for essential goods. While Ollie’s doesn’t solve every problem, it’s helping to keep the lights on for many families.

Inflation Can Still Get Out of Control Again

Logically, one of the last year’s top catalysts for OLLI stock centered on accelerating consumer prices. Although OLLI experienced significant ebb and flow, over the past 365 days, it’s up nearly 31% of equity value. While the Federal Reserve may raise interest rates aggressively to bring prices down, that might not be so effective.

Why? As Barchart contributor Rich Asplund explained recently, expectations of stronger Chinese energy demand boosted crude oil prices. Further, it’s not rocket science to assume that China will be a major impetus for energy-related inflation. It really comes down to basic math.

As you know, China recently reopened its economy, which should get global commercial activity to normalize again. However, greater activity necessarily means increased consumption of critical resources. And that ultimately translates to more dollars chasing after fewer goods – a proposition that the Fed was so desperate to avoid.

Put another way, it might not matter what the Fed does, we could still suffer from inflation. Under this scenario, OLLI stock should rise higher.

Lower Prices Can Still Benefit Ollie’s

Still, it’s not guaranteed that China could spark energy-related inflation. The country could incur its own geopolitical controversy which may reverse recent momentum. Plus, if the Fed gets really aggressive by taking the kiddie gloves off, the subsequent deflationary forces could drive prices down everywhere. Seemingly, that wouldn’t bode well for OLLI stock.

However, lower prices won’t arrive in a vacuum. If the Fed does go bonkers with its rate hikes, the economy could easily slip into recession. Even with the central bank’s “normal” level of aggression, several enterprises were forced to announce mass layoffs. Higher borrowing costs would only exacerbate this condition.

Almost invariably, then, consumers will find themselves in the same net position: they would be hurting and looking for relief. Again, Ollie’s stands poised to help deliver said relief, making OLLI stock a worthwhile contrarian wager.

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