Is Big Lots Ready for a Big Move?

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When a stock's share price is lower than a North Dakota thermometer reading in February, investors tend to give it the cold shoulder. But as fortunes change and the market warms to a stock's prospects, its price can heat up in a hurry. Unfortunately, it's hard tell that a stock is melting investors' hearts until after it's made that upward leap.

Taking the market's temperature
But using Motley Fool CAPS' proprietary ratings, aggregated from the opinions of the 180,000 member-driven investor community, can help us find previously low-rated companies that recently enjoyed a bump in investor confidence. We can see whether they're truly heating up -- or headed back to the deep freeze.

Closeout retailer Big Lots (NYSE: BIG  ) finds itself facing big questions after The Wall Street Journal questioned the prescient timing of stock sales by management. Having provided rosy guidance earlier this year, CEO Steven Fishman proceeded to dump $10 million worth of stock soon afterward. And a month later, Big Lots downgraded its guidance to indicate sales were slowing much faster than they thought. Needless to say, a lot of people were questioning the real motive behind management's moves.

Now that the SEC and the FBI are looking into the matter, the CEO decides it's time to move on to greener pastures.

Caution: contents may be hot
Although the optics of the snafu are poor and $10 million is no small amount of money, it seems hard to believe that after such a storied career at the discounter -- and Fishman has had quite a few achievements during his tenure -- that he'd stumble so miserably  at the end. Considering his stock sales were part of a set trading plan, which admittedly have more holes than Swiss cheese, I'm betting the investigations come to naught.

Wall Street is seemingly unconcerned as well, with analysts at Citigroup (NYSE: C  ) and Zacks recently upgrading the stock. Citi even put it as a buy, believing 2013 will be a better year for it in terms of sales. Zacks agrees with that outlook, but continued pressure on margins has it opting to sit out for the time being. It changed its opinion from underperform to neutral.

Despite the questions hanging over it -- or rather, because of it -- Big Lots is offering up a big discount to investors compared to its dollar-store rivals as well as the larger big-box retailers.

Such a deal
On the cut-rate side, Family Dollar (NYSE: FDO  ) , Dollar General (NYSE: DG  ) , and Dollar Tree (Nasdaq: DLTR  ) trade at a 50% premium to Big Lots, while Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) are a third higher. It's also not without reason.

In addition to the inquiries being made, Big Lots' rivals are forecast to have better earnings growth this year and next year, as well as over the long haul. The competition is expected to see profits expand more than 16% this year and 12% the following year. Even such lumbering giants as Wal-Mart and Costco (Nasdaq: COST  ) look more nimble. And long-term earnings growth for Big Lots, which Wall Street pegs at just under 10%, is eclipsed by its rivals' estimates of nearly 14% growth.

Breaking it down further, the dollar stores are expected to grow per-share earnings by some 16% while the mass merchandisers are coming in at less than 12%. Finding itself somewhere in between those two categories, you'd hope Big Lots' earnings expansion would also fall within those bounds, but that it is outside them -- and to the downside -- suggests the market isn't hopeful it will regain traction in the near future.

Despite having lost 40% of its value from the highs it hit last year, it may have a bit farther to fall to be as much of a discount as the products it sells. With an enterprise value trading north of 15 times its free cash flow, the stock is on sale, but hasn't reached the bargain basement bins just yet. I wouldn't count on Big Lots being a big deal anytime soon, at least not till the investigations are clear and more clarity has been provided about who will assume the CEO's role.

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