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Here's Why Ollie's Bargain Outlet Stock Surged Nearly 16% in January

By Jon Quast - Updated Feb 2, 2021 at 4:48PM

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Short-squeeze mania caused traders to bid this stock up despite negative analyst coverage.

What happened

Shares of Ollie's Bargain Outlet Holdings (OLLI -5.13%) surged 15.8% in January, according to data provided by S&P Global Market Intelligence. If anything, I would have expected the stock to fall during the month, considering it got some negative coverage from Wall Street analysts. But the stock appears to have gotten caught up in the short-squeeze mania fueled by GameStop investors.

So what

According to data from Nasdaq, almost 12.2 million shares of Ollie's Bargain Outlet were sold short as of Jan. 15. As of the company's most recent quarter, there were approximately 65.4 million shares outstanding. Therefore, almost 19% of total shares are sold short, with short interest up significantly since early September. Furthermore, it would take more than eight trading days for shorts to cover, which is a lot. 

A hand holds a tablet device that's projecting holographic images of charts and rising arrows.

Image source: Getty Images.

Normally, high short interest like this would repel investors from Ollie's. After all, a short position means people are betting against it. And as more people bet against a stock, would-be shareholders question what they're missing.

According to The Fly, a Morgan Stanley analyst would say investors are missing how hard it will be for Ollie's to post higher comparable-store sales numbers, considering the bargain retailer's stellar performance in 2020. And a Bank of America analyst would say investors are missing the fact that Ollie's will struggle to source inventory in the coming year. Both firms lowered their price targets for Ollie's stock during January as a result.

However, investors didn't seem to care about these bearish arguments during January, because they were chasing stocks with high short interest in hopes of quick profits. 

OLLI Chart

OLLI data by YCharts.

Now what

It's possible that both the traders and the analysts are thinking too much in the short term with Ollie's. If the stock is going to go up because of a short squeeze, there's a high probability that it will fall back down when the squeeze is done. That's how squeezes work: They're temporary.

That said, challenging comparisons and inventory-management headaches aren't long-term issues, either. Ollie's management has proved adept in the past at sourcing its inventory. Even if 2021 is a challenging year, one would expect normalcy to resume not too long after that.

Furthermore, it's true that Ollie's will struggle to show comps growth in 2021 because of how high sales flew during the pandemic. But if the company continues to turn a healthy profit, does one instance of year-over-year declines wreck the long-term thesis? I contend that it doesn't.

In investing, there will always be people out there thinking in timetables of 12 months or less. Everyday investors can outperform them by setting their time horizon beyond that and holding through the ups and downs.

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Stocks Mentioned

Ollie's Bargain Outlet Holdings, Inc. Stock Quote
Ollie's Bargain Outlet Holdings, Inc.
$43.46 (-5.13%) $-2.35
Bank of America Corporation Stock Quote
Bank of America Corporation
$34.88 (-3.08%) $-1.11
Morgan Stanley Stock Quote
Morgan Stanley
$80.69 (-2.70%) $-2.24
Nasdaq, Inc. Stock Quote
Nasdaq, Inc.
$142.09 (-4.50%) $-6.70
GameStop Corp. Stock Quote
GameStop Corp.
$91.48 (-8.87%) $-8.90

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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