Sportsman's Warehouse Is A Buy At These Levels Price action in Sportsman's Warehouse (NASDAQ: SPWH) tanked in the wake of news it was terminating an agreement to merge with Great Outdoors. The deal was mutual and driven by...

Sportsman's Warehouse Pulls Back Into A Buying Opportunity

Price action in Sportsman's Warehouse (NASDAQ: SPWH) tanked in the wake of news it was terminating an agreement to merge with Great Outdoors. The deal was mutual and driven by a recommendation the FTC would not approve it. The only good news, aside from today's opportunity, is that Sportsman's Warehouse will get a $50 million compensation payment for its efforts.

The news sparked a quick price target reduction from Piper Sandler which rates the stock at Neutral. The analyst there lowered the target to $15 from the agreed-to merger price of $18. The upshot is that now, as we approach the first earnings release post-termination, the stock is setting up as a buy. Not 1 but 2 analysts have out with upgrades and price target hikes ahead of the report and we think they will not be the last. The two upgrades come from Craig Hallum and Lakestreet Capital which rate the stock a Buy with a mutual price target of $20. That compares well with both the merger price and the Piper price target implying about 50% upside for the stock.

The Analysts Underestimate Sportsman's Warehouse

Sportsman's Warehouse is expected to post sequential growth but it is underestimating the company's potential is what we're seeing in the market is right. The company is expected to post 6.6% sequential growth for flat revenue YOY compared to others in the outdoor recreation group who've recently reported. Names like Dick's Sporting Goods (NYSE: DKS) and Hibbett (NASDAQ: HIBB) reported YOY growth in the range of 15% so we will not be surprised to see Sportsman's Warehouse exceed its expectations as well. Hibbett reported an 11.6% comp in its brick&morter locations which is what we are looking for here. The risk in the outlook is the margin and earnings, margins have been compressing and may cut into the bottom line, the question is by how much and will the revenue strength be enough to offset the difference.

Short-Covering Could Help Lift Sportsman's Warehouse

Not everyone was sanguine about the Sportsman Warehouse merger and some traders even acted on the feeling. The short interest in the stock has been running relatively high all year and was sitting just over 8.0% going into the first of the month. Now, with shares down more than 25% from their high, it looks like short-covering may start this week. Assuming the earnings report is as good as we think it is. Regardless, at some point in the future, this stock will bottom because it is a solid company in a growing market. When that happens, the short-covering will help drive the reversal and it could be this week.

The Technical Outlook: Sportsman's Warehouse Is Moving Lower

Sportsman's Warehouse is moving lower under the influence of short-selling and risk arbitrage traders cutting their losses. The move has so far trimmed about 25% off of share prices and the stock could easily move lower before it moves higher. The first target for really firm support is near the $12 and a bottom that began forming just before the merger deal was announced. If that level can't hold, this stock may be heading even lower but we don't see that in the cards. What we see is results outpacing expectations and the reversal beginning in their wake. We could be wrong.