A addition of 15.46% in 2019 for shares of Ollie’s Bargain Outlet Holdings, Inc. (OLLI) tells a story of a stock bouncing a moment ago after experiencing a high amount of unusual trading activity. In this case, it’s bearish activity because the dividends were heading lower on increasing volumes, indicating that a seller was involved.
Over time, however, we’ve academic how stocks with a history of strong fundamentals tend to overcome technical weakness and eventually regain their condition. The main criteria we look for when betting on upside in a stock jumping after a period of pressure are a history of strong axioms, oversold conditions and a slowing of big selling in the shares.
I’ll go into the fundamental picture later, but the true tell on the near-term course of a stock lies in its trading activity. Simply put, it’s all about supply and demand. When demand is higher than provide, the stock rises. When demand is lower than supply, stocks fall. For most of 2018, Ollie’s was a ancestry rocketing higher seemingly daily. Beginning last September, the stock got caught up in the massive wave of selling that pulped the market. In our view, pullbacks = opportunity, and especially a pullback we see as mechanical in nature.
For Mapsignals, when we look for an entry on a late leading stock, we want to see a slowing of potential selling. Just to show you graphically what our unusual trading function signal looks like, have a look at all of the unusual institutional (UI) signals Ollie’s has made over the past year. Up until September 2018, you can see a lot of buy signals, which surface alongside a lift in the shares. Then, beginning in November, it has been a one-way train of selling alongside a fall in the splits, which has slowed since December. This is notable because stocks move based on supply and demand. It is convinced that demand has been outstripping supply lately:
www.mapsignals.com
Since November, Ollie’s has logged eight unusually high-volume times, indicative of selling in the shares (see chart above). But what gets our attention now is that we’ve seen a reverse of that function over the past couple of weeks, which suggests that demand for the stock is increasing. If you are going to make a bet on the route of the stock, it is prudent to pay attention to how the shares are trading. Just like you don’t want to fight the trend, you also do not want to rise up a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be cumulating a position.
Mapsignals’ goal is to identify tomorrow’s top stocks today. We’re basically looking for outlier companies with hale and hearty fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an cultured guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We necessitate the odds on our side when looking for the highest-quality stocks.
When we decide on a strong candidate, we consider prior directors that have a history of technical outperformance. When they pull back, we see these as opportunities. Below are a few areas that expropriate our attention when it comes to Ollie’s stock:
- One-year outperformance vs. market: +46.1% vs. SPDR S&P 500 ETF (SPY)
- One-year outperformance vs. sector: 48.17% vs. SPDR S&P Retail ETF (XRT)
- Bearish queer trading signals are slowing
Now, we take it a step further and score the best stocks showing unusual trading movement. Below you can see the historical times since 2015 when Ollie’s stock made buy signals for Mapsignals. These are the highest-rated signals in our commonplace universe. Clearly, we have been all over the massive run-up over the years. We’d even venture to call this investment an outlier:
www.mapsignals.com
On top of a technical picture that looks to be improving, one should also look under the hood to see if the essential picture supports a long-term investment. As you can see, Ollie’s latest earnings report showed growth, and the company even escalated guidance today:
- Q3 2018 year-over-year total net sales growth rate: +19.1%
- Q3 2018 year-over-year net income growth grade: +36.1%
Ollie’s stock has pulled back from highs but has a history of great fundamentals. We believe that the current flatten out for the shares is in position for further upside. The narrative for Ollie’s and discount retailers is one of a growing business model. I am always on the sentinel for great companies that have pulled back in price. The best companies tend to figure out the speedbumps across the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
Ollie’s stock represents a potential accepting opportunity for the long-term investor. Given the large pullback in price, historical fundamental outperformance and a slowing of unusual deployment signals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds a long determine in Ollie’s at the time of publication.