Ollie's Ollie's Oxen Free!

It amazes me when previous market darlings suffer dramatic declines, and then nobody wants to own them at fractions of what they paid previously.

Ollie's Bargain Outlet Holdings (OLLI)  is now in that category. Ollie's came public on July 16, 2015, priced at $16 per share. The opening market-based trade came at $22.68, almost 42% higher.

All major business metrics grew rapidly. By May of 2019, traders had pushed the shares up to $103, representing 52.6-times forward earnings. Ironically fiscal 2019 was the first year of slower earnings per share growth. OLLI closed on Dec. 30, 2019 at $69.25, while still fetching 35.3-times trailing EPS.

The Covid panic that erupted in March 2020 slammed OLLI along with almost everything else. OLLI fleetingly plunged to $28.83 on March 15, 2020 before rallying sharply. By early June of 2020 it had already rebounded to $112.60.

Ollie's actually benefited mightily from Covid-related government-imposed store closures. They sold food products and thus were granted "essential" status and allowed to remain open. Customers could go to Ollie's and buy anything in the stores including general merchandise in most states.

The same thing was true for Walmart (WMT) , Target (TGT) , Big Lots (BIG)  and both Dollar General (DG)  and Dollar Tree (DLTR) . Ollie's posted its highest net profit margins ever while racking up fiscal 2020 EPS (FY ended Jan. 30, 2021) of $3.16.

The shares carved out an all-time high north of $123 on that news.

That one-time Covid-related benefit did not repeat in fiscal 2021. Margins retreated to more normalized levels. EPS are expected to come in about $2.35 when fourth-quarter numbers are released in early March.

The company's long-term prospects remain strong. Value Line sees EPS edging up to $4 not later than 2026, supporting a projected price range of from $75 to $115 again by then.

Ollie's is net debt-free and held almost $230 million in corporate cash as of Oct. 30, 2021, about $3.65 per share. The firm has no defined pension plan and no preferred shares.

OLLI's somewhat greater than normal volatility makes for great trading opportunities. It doesn't take long for rallies to unfold when enthusiasm runs high.

OLLI set a new absolute low of $44.80, since April of 2020, intraday on last Friday. That put the shares at just 19.4-times very conservative profit estimates for fiscal 2022. It has rarely been cheaper, valuation-wise.

Yahoo Finance calls the shares undervalued. Its 12-month goal price sits at $61.80, about 37% above last week's closing quote.

Research house Morningstar is more bullish on OLLI than that. Its computer-generated present-day fair value estimate now registers at $76.32.

Last week's sell-off took the stock into 5-star (best-buy) territory.

Clearly, potential reward appears to outweigh risk on OLLI from today's price. How can I explain my headline, though, about posting 40% annualized gains even if OLLI dips back a bit?

Here is the math on a Jan. 19, 2024 expiration date, $40 strike price buy/write combination using OLLI.

Actual pricing on OLLI's two-year out options, with the shares at $45.30, are shown below.

I chose to illustrate a conservative combo using in-the-money, $40 calls, and out-of-the-money, $40 puts. The graphic below shows the minimum 100-share, one call and one put quantities.

If executed in a margin-type account, with adequate free buying power, the total outlay on each combination dropped to just $2,200.

Come expiration day there are just two possible outcomes. OLLI will either close at $40 or higher, or below $40.

Any close at $40 or better would generate the sequence of event s shown below as the best-case scenario.

Note that OLLI was above $45 at the start. Best-case results would be forthcoming even if the stock dips by up to $5.30 per share (-11.6%) from the trade inception price.

In my world a high probability of netting almost 82% in about two years is pretty awesome. This combination would deliver that if OLLI goes up, sideways or down not more than 11.6%.

What if OLLI fails to hold the $40 mark?

If so, the worst-case scenario detailed next would take effect. Barring total disaster for Ollie's even that appears far from scary.

OLLI could fall by as much as 31.5% without any loss. That's a major bear market sized decline in "margin of safety" for combination writers.

Future stock market action can never be guaranteed. That said, the chart below shows that owning Ollie's at the $31 break-even price would have been a winning position for all but a few days since July 1, 2017.

Ollie's looks fine as a plain vanilla purchase of shares. It might be even better, with less risk, as part of a buy/write combination.

Committing to a two-year expiration date combination provides the most money in the door up front along with the largest possible margin of safety versus outright share ownership alone.

Ollie's shares might be the best bargain that is now "in stock and available for purchase."

At the time of publication, Price was long OLLI shares, short OLLI options; short DLTR puts.