Steel City Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. During the third quarter of 2020, the fund returned 1.6% net of fees, while the S&P 500 Index was up 8.5%. You should check out Steel City Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Steel City Capital highlighted a few stocks and Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) is one of them. Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) is a discount store company. Year-to-date, Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) stock gained 41.1% and on October 27th it had a closing price of $92.14. Here is what Steel City Capital said:
“Ollie’s Bargain Outlet (Short): OLLI delivered a blowout second quarter – same store sales were up 43.3% and overall sales were up 58.5%, operating income tripled, and the company generated more than $160 million of free cash flow. Current conventional wisdom is the company’s position as a bargain retailer in the middle of a recession should support improving financial performance and thus its stock price. But in reality, shares are down nearly 15% since the company reported second quarter results. What gives?
Underpinning OLLI’s robust cash generation was strong sell through of existing inventory. At the end of the second quarter, inventory sat at ~$895,000 per store, more than 10% below the company’s three-year average of approximately $1,000,000 per store. At first blush, declining inventory would seem like a positive, particularly given my prior contention that OLLI was over-inventoried late last year. But today, the pendulum has swung too far in the opposite direction. With sales on track to grow at a mid-teens clip in the third quarter, I anticipate store-level inventory metrics will further deteriorate.
Absent the ability to quickly restock – which is challenging given the current speed of the treadmill – OLLI will likely struggle to maintain positive comps over the next several quarters and will face particular challenges in 2Q and 3Q of FY’2021. OLLI currently trades at 31x next year’s earnings, in-line with the company’s 3- and 5-year averages, which I believe makes for an attractive short position given the fundamental outlook.”
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In Q2 2020, the number of bullish hedge fund positions on Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) stock increased by about 26% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Ollie’s Bargain Outlet’s growth potential. Our calculations showed that Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
