This report is the opinion of the author. The author is long PLCE and SCVL. See disclosures and disclaimers.
Summary. Throughout 2017, 2018 and 2019, my best performing strategy has been that of repeatedly buying the dips on a small number of oversold Bricks and Mortar Retailers (“BaMR”s or “Bammers”). There are clear reasons why this trade keeps working over and over again. In fact, with each of Dillard’s (DDS), Revlon (REV) and Restoration Hardware (RH), each single ticker provided multiple opportunities to buy the dip just ahead of quick rebounds of roughly 40-60%. These would often occur within around 3-8 weeks. Links to my past reports on those names and commentary is included at the bottom of this report.
Right now I am long Children’s Place (PLCE) and Shoe Carnival (CNVL). As with those other “Bammer” rebound trades above, I suspect I might be in these trades for up to 3-8 weeks, and I am hoping for a similar price bounce of roughly 40-60%. Among other things, I observe that from a trading standpoint, the run up into the Thanksgiving and Christmas holidays has often been a good time to be long on some of the lower float higher short interest names.
Double Whammy becomes Triple Whammy (why these rebounds are often so sharp). There are recurring themes among many of these Bammer rebound trades: they are low float, heavily shorted and being pushed higher as a result of aggressive company buybacks. Certainly those are “technical” themes that are worth paying attention to. But there is a bigger picture concept to understand with these trades, and it is more fundamental in nature. When sentiment towards a stock (or a sector) becomes too bearish, it only takes a slight “surprise” improvement to see an extremely sharp rebound in the share price. First comes the re-evaluation of the stronger-than-expected business results. That part is easy. But then any inherent upside also gets further amplified based on “multiple expansion” once investors re-rate stronger future prospects on the visibly stronger (current) business. It is this “double whammy” which often causes such price rebounds to be larger and sharper than even the bulls had expected. And when we then look specifically at stocks with a high short vs. low float and an aggressive buyback, these factors quickly combine into a “triple whammy”. These are the reasons why I often expect such large potential price moves on such trades, and this is why I search for this specific combination when screening for trade ideas.
Methodology across “Bammer” stocks. Children’s Place and Shoe Carnival are generally classified as “specialty retailers” who operate in niche segments within “Bricks and Mortar Retail/Apparel”. But I apply a fairly consistent methodology across different niches, regardless if the company makes lipstick, home furnishings, shoes or whatever. Below are how some of my usual criteria apply to Children’s Place and Shoe Carnival.