An Unlikely Momentum Play

The Market bounced back strongly last week with the Dow Jones up 3.72%, the S&P 500 rising 3.26% and the NASDAQ recovering 2.61%. The MCSI Emerging Markets Index had an exceptional week, soaring 6.21%.

Alaska Air (ALK) dipped below its 50-day moving average and moved to a HOLD.

This week’s Bull Market Alert recommendation is Big Lots Inc. (BIG), a discount merchandiser specializing in selling closeout merchandise at its more than 1,400 retail stores in 48 states. The chain offers brand-name products from 3,000 manufacturers of furniture, seasonal goods, consumables and even food.

Truth be told, Big Lots was never an impressive player in the retail space.

Yet here’s why that is changing and why I expect Big Lots to continue its recent strong run.

First, the company is undergoing a turnaround with a new management team committed to driving high earnings growth. And its efforts are already paying off.

The company’s Aug. 28 quarterly earnings report beat estimates on both revenue ($1.21 billion vs. estimates of $1.20 billion) and earnings (40 cents per share versus 34 cents per share).

Management also raised earnings guidance from $2.87 per share to a range of $2.90 to $3.00. Earnings are forecast to rise 20% in fiscal year 2016 and 19% the year after.

Second, the stock has both momentum and relative strength. Big Lots is actually up 6.8% over the past month — the toughest stretch of market performance in recent memory. It is also one of the few stocks around which is trading above the level it was before the Aug. 24 sell-off.

Third, Big Lots looks cheap, trading at a lower price-to-earnings (P/E) multiple versus its peer group, despite its faster earnings growth prospects. No wonder Citi put a $58 target price on the stock — 16% upside from Friday’s closing price.

So buy Big Lots Inc. (BIG) at market today, and place your stop at $44.00.

As the stock is overbought short term, I am holding off on recommending options this week.

Portfolio Update

ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA) closed the week flat. Oppenheimer analyst Andrew Burkly highlighted three important trends his firm is listing as strong plays — one being “specialty retail,” of which ULTA is an example. Burkly cited strong consumer spending and consumption, driven by lower commodity and energy prices, as well as the seasonally strong fourth quarter, as a driver for higher ULTA prices. ULTA remains a BUY.

Alaska Air (ALK) fell 4.21% last week. Helane Becker of Cowen & Company noted that many airlines have issued higher earnings guidance as of late, and 2015 will end as “a record year for the airlines.” She cited a strong fourth quarter, supercharged by holiday travel, as pushing airline revenues higher. ALK will report earnings on Oct. 22, before markets open. ALK dipped below its 50-day moving average (MA) to become a HOLD.

Ultra Nasdaq Biotechnology ProShares (BIB) lost 4.42% over its opening week in the portfolio. Despite its weak start, the technicals point to a bright future for BIB. BIB has been consolidating in sideways trading over the last two weeks along a recent support level at the $53.50 mark. The exchange-traded fund (ETF) is also oversold, according to the slow stochastics indicator, suggesting that it is due for a strong bounce. BIB is a BUY.

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