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Our latest featured recommendation is Big Lots (BIG), a discount retailer selling closed out brand-name merchandise, explains value investing specialist Roy Ward, editor Cabot Benjamin Graham Value Investor.

The company sells beverages and groceries, candy and snacks, specialty foods, health and beauty products, and pet food and supplies — at prices 20% to 40% below most discount retailers.

Big Lots also sells home décor goods, small appliances, furniture and seasonal merchandise. Big Lots was founded in 1967, is headquartered in Columbus, Ohio, and operates 1,425 stores in 47 states.

Management is focused on improving merchandising and marketing within the core U.S. business. Underperforming stores are being closed, existing stores are receiving upgrades, and coolers and freezers are being installed in many stores. Big Lots is expanding its e-commerce platform, which will also add future sales.

Big Lots reported solid results and raised guidance. Sales for the quarter ended April 29 declined 1%, same store sales dipped 0.9%, and EPS jumped 46%.

Same-store sales were weak in February due to extensive store renovations but rebounded in March and April. Management raised its earnings forecast for the remainder of 2017.

Sales will likely increase 5% during the next 12 months ending July 31, 2018. EPS will rise 1% to $4.44, although management’s ambitious initiatives could help push sales and earnings even higher.

The current 15.8 P/E is easily justified by Big Lots’ new growth prospects. The company’s high 24% return on equity will produce plenty of cash flow per share ($7.15 in 2017).

Standard & Poor’s awards Big Lots its highest Fair Value rating of 5 and Stars rating of 4, along with an above average Quality rating of B+.

I expect Big Lots to establish a record of steady sales, earnings, and dividend growth now and in future years. BIG shares will likely rise 30% and reach my minimum sell price target of $62.81 within one to two years. Buy at $48.49 or below.

Roy Ward has been chief analyst of the Cabot Benjamin Graham Value Investor since 2003.

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