Best Buy (BBY)
Click to Enlarge Finally, we come to our surprise pick of the day.
Best Buy (BBY) is coming fresh off a post-earnings beating that many on Wall Street believe is overdone. The company saw same-store sales increase year-over-year on the quarter, with earnings easily topping Wall Street’s estimates. But because Best Buy warned that margins could take a hit during the holidays due to price matching, the stock was punished.
But there are several factors working in Best Buy’s favor. Online sales are improving at a rapid clip, rising 15% during the most recent quarter, driven by an improved website and customer’s ability to order online and pick up in the store. Also, BBY is coming off strong product launches from next-gen gaming consoles: Sony’s (SNE) PS4 and Microsoft’s (MSFT) Xbox One. In fact, PS4s were sold out in several stores due to strong demand: Sony sold a record-breaking 1 million units in the first 24 hours.
Despite the company’s prospects, there isn’t much love on Wall Street for BBY stock. Nine of the 23 analysts following the stock rate it a “hold” or worse, while nearly 6.7% of the stock’s float (shares available for public trading) is sold short. There is a shift beginning, however, especially among short sellers, where BBY saw a 27% decline in short interest during the most recent reporting period.
Options activity could also be indicative of nervous short sellers. Currently, BBY sports a put/call ratio of 0.59 for the November/December series of options, with calls nearly doubling puts for this time frame. The Dec 49 is the most popular call strike, sporting 34,687 contracts, though this open interest was likely in existence prior to BBY’s earnings selloff. Still, the Dec 40, 43, and 45 all sport open interest in excess of 11,000 contracts, pointing toward growing optimism from traders or increased hedging from short sellers.
Technically, BBY is trading in oversold territory, with the shares bouncing off long-term support near $38. Best Buy stock is now looking to retake the 40 region, which is home to its rising 50-day moving average. A reclamation of this trendline should quell some investor fears and bolster buying support for BBY, and stronger-than-expected Black Friday sales could be just the catalyst for such a move.
Those looking to get in on the BBY rebound might want to consider a Jan 39/45 bull call spread. At the close on Monday, this spread was offered at $2.09, or $209 per pair of contracts. Breakeven lies at $41.09, while a maximum profit of $3.91 is possible if BBY closes at or above $45 when January options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.