Turning around a company the size of Best Buy (BBY) isn’t easy in the best of economic times. As long-term BBY stock holders know, it is downright painful in the current market environment.
Best Buy is slated to release its first-quarter earnings report ahead of Thursday’s open, and while many on Wall Street are expecting a throwaway quarter, Best Buy earnings guidance or forward-looking statements could make or break BBY stock.
Best Buy Expectations
For the record, Wall Street is anticipating Best Buy earnings will come in at 20 cents per share, while revenue is expected to have fallen roughly 2% to $9.2 billion. While Best Buy no longer offers up official earnings guidance, analysts still are forecasting full-year earnings to come in at $2.20 per share.
Historically, Best Buy has a habit of topping earnings expectations, having done so during each of the past four periods. This might explain why the company’s whisper number arrives 5 cents higher than the consensus at 25 cents per share, according to EarningsWhisper.com.
Despite repeatedly beating Wall Street’s targets in the past, BBY stock has averaged a single-day loss of about 1% in the session immediately following the past four Best Buy earnings reports. That is not to say, however, that BBY stock doesn’t react to earnings reports.
In fact, Best Buy averages a one-day price change of more than 6.6% in reaction to quarterly reports.
This time around, May option implieds are pricing in a potential post-earnings move of about 7.1%, placing the upper bound near $27.85, while the lower bound lies at $24.15.
Click to Enlarge Technically speaking, BBY stock is still recovering from a beating it took early in 2014. The shares are off their February lows near $20, but have been unable to push past overhead resistance near $28. Currently, BBY is perched above its 50-day moving average, which could offer up short-term support.
So, where is BBY stock headed in the wake of this week’s earnings report?
Depends on who you ask.
If you ask the brokerage community, the direction is upward. According to data from Thomson/First Call, 15 of the 25 analysts following BBY stock rate it a “buy” or better, and the 12-month price target of $37 represents a hefty premium of about 42% to Monday’s close at $26.12.
Short sellers, on the other hand, have taken out sizable bets against BBY stock. Despite a small decline during the most recent reporting period, some 29.5 million Best Buy shares are currently sold short. Representing a hefty 10.3% of the stock’s total float, these short positions could provide fuel for a short squeeze situation should Best Buy benefit from any positive news.
However, judging from short-term options activity, these short sellers may be getting a bit nervous.
The May put/call open interest ratio for BBY currently rests at 0.54, so calls nearly double puts among options set to expire at the end of this week. This excitement falls off quite a bit when we pull back to look at June options, where the put/call open interest ratio rises sharply to 1.1.
2 Options Trades on BBY Stock
Bull Call Spreads: With expectations exceedingly low, it is possible that BBY stock could see a post-earnings pop on even the slightest good news. As such, those traders looking to capitalize on such a move might want to consider a June $26/$27 bull call spread. At last check, this spread was offered at 46 cents, or $46 per pair of contracts. Breakeven lies at $26.46, while a maximum profit of 54 cents is possible if BBY stock closes at or above $27 when June options expire.
Selling Puts: Alternately, if BBY’s upside potential doesn’t thrill you, then a June $22 put sell might be a viable way capitalizing on technical support. The June $22 put was last bid at 22 cents, or $22 per contract. On the upside, a put sell strategy allows you keep the premium as long as BBY closes above $22 when June options expire. On the downside, if BBY stock trades below $22 ahead of June options expiration, you could be assigned 100 shares for each put sold at a cost of $22 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.