Best Buy Shapes Up as a Sell

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Because this is the “dead zone” of earnings reporting, we’re forced to go out further and further for solid earnings plays. In fact, we’re reaching out almost two weeks for now to find our next potential trade for options trading investors. It’s on retail giant Best Buy (NYSE: BBY), which reports before the open on June 14.

This has been a rough season for retailers of all stripes, although competitor hhgregg (NYSE: HGG) had a surprisingly good quarter. But HGG relies more heavily on appliance sales, while BBY counts on TV sales, which have been weak across the board. Recent economic data is showing stalled job growth, a slumping housing market, and weakening consumer sentiment. The recent downtrend in the data does not bode well for stores that sell discretionary items that depend on a few extra dollars in consumers’ pockets.

Earnings reports have not been kind to BBY of late, as the company has fallen short of three of the past seven estimates. What’s more, recent price performance after earnings has been horrible. The stock has plunged after three of the past four reports, averaging a stomach-churning drop of -12% in just the week following each report.

The chart is showing a stock that is struggling to take out its declining 100-day moving average. In fact, the last time the stock closed above this trend line was right before BBY’s earnings report in December.

Sentiment is unspectacular, although one would expect more pessimism than we’re seeing. Eleven of 24 covering analysts refuse to come off their “buy” ratings, while short interest is moderate and certainly not enough to start a short-squeeze rally. That tells us that misplaced optimism could unwind into more selling.

This is not a good time to be a retailer, unless you’re on the high-price end of the spectrum, which BBY is clearly not. The economy is sputtering and consumers are hesitant.  Recent earnings reports have not been kind to the stock, and we see no reason why that shouldn’t continue on June 14. Buy the BBY July 31 Put for around $1.50.

 

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Article printed from InvestorPlace Media, https://investorplace.com/2011/06/best-buy-shapes-up-as-a-sell-bby-hgg/.

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