A gain of 15.46% in 2019 for shares of Ollie's Bargain Outlet Holdings, Inc. (OLLI) tells a story of a stock bouncing just after experiencing a high amount of unusual trading activity. In this case, it's bearish activity because the shares were heading lower on increasing volumes, indicating that a seller was involved.

Over time, however, we've learned how stocks with a history of strong fundamentals tend to overcome technical weakness and eventually regain their footing. The main criteria we look for when betting on upside in a stock jumping after a period of pressure are a history of strong fundamentals, oversold conditions and a slowing of big selling in the shares.

I'll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in its trading activity. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For most of 2018, Ollie's was a stock rocketing higher seemingly daily. Beginning last September, the stock got caught up in the massive wave of selling that crushed the market. In our view, pullbacks = opportunity, and especially a pullback we see as mechanical in nature.

For Mapsignals, when we look for an entry on a prior leading stock, we want to see a slowing of potential selling. Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the unusual institutional (UI) signals Ollie's has made over the past year. Up until September 2018, you can see a lot of buy signals, which occur alongside a lift in the shares. Then, beginning in November, it has been a one-way train of selling alongside a fall in the shares, which has slowed since December. This is notable because stocks move based on supply and demand. It is clear that demand has been outstripping supply lately:

Chart showing the unusal institutional (UI) signals made by Ollie’s Bargain Outlet Holdings, Inc. (OLLI)

Since November, Ollie's has logged eight unusually high-volume days, indicative of selling in the shares (see chart above). But what gets our attention now is that we've seen a reverse of that activity over the past couple of weeks, which suggests that demand for the stock is increasing. If you are going to make a bet on the direction of the stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also do not want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they pull back, we see these as opportunities. Below are a few areas that grab our attention when it comes to Ollie's stock:

  • One-year outperformance vs. market: +46.1% vs. SPDR S&P 500 ETF (SPY)
  • One-year outperformance vs. sector: 48.17% vs. SPDR S&P Retail ETF (XRT)
  • Bearish unusual trading signals are slowing

Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2015 when Ollie's stock made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we have been all over the massive run-up over the years. We'd even venture to call this stock an outlier:

Chart showing historical buy signals made by Ollie’s Bargain Outlet Holdings, Inc. (OLLI)

On top of a technical picture that looks to be improving, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Ollie's latest earnings report showed growth, and the company even raised guidance today:

  • Q3 2018 year-over-year total net sales growth rate: +19.1%
  • Q3 2018 year-over-year net income growth rate: +36.1%

Ollie's stock has pulled back from highs but has a history of great fundamentals. We believe that the current level for the shares is in position for further upside. The narrative for Ollie's and discount retailers is one of a growing business model. I am always on the lookout for great companies that have pulled back in price. The best companies tend to figure out the speedbumps over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

Ollie's stock represents a potential buying opportunity for the long-term investor. Given the large pullback in price, historical fundamental outperformance and a slowing of unusual distribution signals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: The author holds a long position in Ollie's at the time of publication.