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I grew up in the 1970s and recall fondly watching the TV series "Dallas" with my family on Friday nights. Everything on the culturally sensational show was big, including its storylines.
Of course, one of my favorites was "who shot J.R.?" But another favorite was the return of Bobby Ewing after a supposed death that was resolved by stating the entire season was a dream.
I like to use the dream analogy for stocks that have made a round trip journey in a short period of time. If a stock goes up only to return to the level previously, it is as if the investor woke from a dream and the stock never actually moved up.
Such is the story of closeout retailer Big Lots (NYSE: BIG).
Shares started the year around $15 per share. Enthusiasm over profits and performance as consumers in a struggling economy sought lower-priced options fueled a gain in BIG.
Shares more than doubled in value, but hit a roadblock in late August. At that time, earnings that beat estimates were not enough to keep the momentum going. I wrote about the company at that time and suggested that investors in BIG should take money off the table.
Lock in profits was my advice, as I expected BIG to retreat in value as the economy strengthened. I was correct in my recommendation, but my reasoning was faulty.
Instead, the company ran straight into a credit crisis and a collapse of the consumer economy. Even with big discounts, BIG's emphasis on mostly discretionary spending did not bode well when customers were only buying the essentials.
BIG shares did indeed collapse and now trade for just over $14 per share.
Wake up, 2008 was only a dream.
The year had looked so promising, but now is just a dud. For investors in BIG, it is as if the year never happened.
So once investors wake from the dream, or nightmare in most cases, what do we do with BIG going forward?
The retail sector is performing dismally. Reports suggest that tens of thousands of stores will be closed in the coming year. There appears to be no end in sight to the weakness.
Earlier this month, BIG reduced fourth-quarter expectations and did not provide any guidance for 2009. Instead of making a profit of $1.02 to $1.09, the company now sees fourth-quarter profits, including the holiday season, to be 90 cents to 99 cents per share.
On the surface, the reduction in guidance is troublesome, but it does reflect operating conditions that are very weak. I suspect the company will benefit greatly as those tens of thousands of stores file for bankruptcy and liquidate inventory.
At the same time, the economy will strengthen at some point during the year. As 2009 plays out, I look for BIG to show reductions in costs and increases in profit margins.
I would be a buyer at these prices.
The new year will be more than just a dream.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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Reader Comments (Page 1 of 1)
12-31-2008 @ 2:38PM
Fred Srock said...
You dream Jamie. BIG is still pumping millions of dollars of worthless, overpriced "Plastic Pumpkins" into their stores as we speak. Echo Point and Broyhill buys to be specific. Same stuff, different year. They've learned nothing in spite of CEO Steve Fishman's observation that people are not buying unnecessary things.
Now, with the impending smorgasboard of overstocked Plastic Pumpkins being available for purchase, they'll accomplish little more than cramming their 1366 locations with useless inventory that will not move until it is discounted 90%. At the same time, it will occupy retail space that would be far more profitable filled with consumables and necessary hard and soft lines.
Jamie, your observations are not based on what is actually happening in the stores - a deficiency shared by Big Lots upper management.