Best discount store stock to buy after retail sales dropped in May: Big Lots

By: Motiur Rahman
Motiur Rahman
Md Motiur enjoys researching how companies are solving challenges the world will face over the coming decades. In his… read more.
on Jun 16, 2021
  • US retail sales fell 1.3%, 0.7% (core) in May, both coming short of analyst expectations.
  • Retail stocks extended declines amid a decline in retail spending and rising inflation concerns.
  • But some stocks still look significantly undervalued. So which retail stock should you buy now?

The Commerce Department said US retail sales for May fell 1.3% on Tuesday. Analysts polled by Reuter expected a decline of 0.8%. Core retail sales also fell 0.7% compared to a consensus market expectation of -0.6%.

Retail stocks have pulled back in the last two weeks amid rising inflation and a decline in retail spending. Therefore, consumers are becoming cautious about what they buy, and this will have a significant impact on companies that sell consumer goods.

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However, some stocks trade at low valuation multiples, making them more attractive as prices decline.

Big Lots looks massively undervalued

Big Lots Inc. (NYSE:BIG) is an interior decor and home improvement company based in Colombus, Ohio. BIG shares gained 53% this year and over 85% in the last 12 months. 

The company benefitted from the successful roll-out of Covid-19 vaccines. The prospect of returning to normalcy appealed to investors.

However, Big Lots stock looks relatively cheap despite the current 12-month gains. The stock trades at an attractive price-earnings ratio of 3.76, which implies a lot of upside potential. The company delivered an EPS surprise of 51% in the most recent quarter, sparking a rally of nearly 19%.

Although the fall in US retail sales will affect top-line prospects, analysts expect this to be only temporary. Reuters said retail sales retain a bullish outlook despite the decline in May. Therefore, investors will look at the overall picture when buying the shares of retail stocks.

Source – TradingView

Technical overview

Technically, Big Lots shares are down nearly 10% since 8th June. The stock is now trading closer to the oversold levels of the 14-hour RSI in the 60-min chart. It fell below the 100-hour moving average, but this is not unusual. 

BIG looks poised for an immediate rebound that could push the stock price to $68.75 or even higher, $72.28. The key support levels are $62.30 and $58.98.

Bottom line: BIG Lots stock price rebound looks inevitable

In summary, Big Lots looks poised for a rebound after falling closer to oversold conditions. The stock also seems competitively valued at a P/E ratio of 3.76. 

For reference, other discount stores trade at relatively high valuation multiples of at least 16.00 as of this writing. It makes BIG shares relatively more attractive to value investors than its peers.

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