Big Lots (BIG) reports its third-quarter earnings Friday before the open of trading. It's a discount retailer that might not seem like a stalwart in this dicey retailing environment.
But as a retailer with a reliable history of out-performing expectations, it's worth paying some attention to the announcement. Estimates call for the company to post a loss of one cent a share.
It's also worth noting the way the stock has a specific pattern of trading on earnings announcements, and identifying that pattern might afford the best investment opportunity.
Big Lots has recorded 10 straight quarters of same store sales growth. The last eight quarters its earnings beat expectations. And often by a factor of 15% or more.
Though, here comes the "but." The stock has an unfortunate history of trading sharply lower on the heels of even its glossiest earnings.
Look at how the stock performed following the release of second-quarter results on Aug. 26, which easily trumped expectations. The stock had been trading at $56 a share in mid-August. By late October, it had fallen to $43. And this - again - is in response to good news. But anybody who courageously identified that October bottom as a buying opportunity would have booked a tidy 23% return in little more than a month, with the stock now trading at $50.
Obviously nobody can predict a repetition of the cycle following the third quarter announcement. Though, in fact, if enough investors have identified this pattern, the gains of the last month mean this has become a classic crowded trade. Short interest in the stock has climbed to 28% of the float. (Which, in and of itself, hints at the possibility of a short squeeze that would drive the stock higher, at least temporarily.)