Stay Away From OLLI Stock While Short Interest Remains High Shares of Ollie's Bargain Outlet (NASDAQ:OLLI) gapped higher on May 28 after the discount chain pleased investors with its first-quarter earnings report.

Shares of Ollie's Bargain Outlet (NASDAQ:OLLI) gapped higher on May 28 after the discount chain pleased investors with its first-quarter earnings report. The discount chain reported earnings per share of 80 cents which was 26.9% higher than analysts' expectations of 63 cents. Ollie's also beat on the top line by posting $452.5 million in revenue, which was 6% higher than analysts' forecasts.

But after that initial bump, OLLI stock is finding it difficult to push higher. And with the stock drawing a considerable amount of short interest, it may be better to wait to enter a position.

A Bearish Signal

OLLI stock is currently drawing about 14.85% short interest. By itself, a short interest percentage doesn't confirm bullish or bearish sentiment. However, in the case of Ollie's the short interest is significantly higher than that of Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) which have short interest below 2% (as of this writing).

On the other hand, having short interest above its sector peers could be setting OLLI stock up for a bullish move higher. The premise is that if Ollie's continues to deliver good news, investors who are holding short positions will have to buy OLLI stock to cover their positions. This would be a smaller scale "short squeeze" that propelled many stocks higher in February 2021.

And this is why caution is warranted with OLLI stock.

The Future Lacks Clarity

Many analysts expected discount chains to post strong quarterly earnings. However, as the economy reopens, a larger question is how companies, such as Ollie's, will perform as consumers have more options for their discretionary dollars.

At least initially, the numbers are telling a strong story. One key metric for any retail store is comparable store sales. And Ollie's reported a year-over-year (YOY) gain of over 18% in that category. Plus, the company saw an increase in revenue due to having 40 more locations than at the same time in 2020. All of this helped account for an eye-popping net profit of $55 million (a 65% YOY gain).

But as any stock analyst will tell you, stock forecasts are not about what you have done, but what you are going to do. Ollie's provided optimistic, but ultimately incomplete, guidance. And that may explain why the stock is failing to gain traction.

Another reason for the cautious overtones is that Ollie's was underperforming its sector counterparts in the year preceding the pandemic. To be clear, Ollie's did very well during the pandemic. In fact, the company's performance with its brick-and-mortar stores was a canary in the coal mine that was playing out in the retail numbers. But investors appear to be skeptical that this will continue as the economy reopens.

One thing that Ollie's can do to change investor's minds is to achieve its goal to open 50 new stores in 2021. With a footprint of only about 400 locations nationwide, that would represent strong growth. And the company reported that it is on track to deliver on that goal.

Analysts Have a Bearish Outlook

It appears that there's been more institutional selling than buying for OLLI stock. That could help explain why the stock is currently butting up against its 12-month consensus price target. What is more concerning to me is that the stock has three sell ratings.

In today's market, a sell rating is fairly uncommon. So when you see three out of 13 analysts give OLLI stock a sell rating, it's not something to easily look past. Of course, bullish investors will note there are five buy ratings. And several individual analyst price targets point to a nice gain.

With all that said, I think there are just several more appealing stocks in the discount retailer space; the aforementioned DG stock being one of them.

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