Best Buy (BBY) posted quarterly results Tuesday, and while Best Buy earnings had exceeded expectations in five of the past six quarters, the company still delivered generally disappointing numbers yet again.
BBY stock is under pressure this morning on news that sales slipped — even though profits technically beat.
Bigger-picture, Best Buy earnings continue to tell a story about the bottom line, and challenges for the brick-and-mortar retailer in an era of e-commerce and relatively weak consumer spending.
It all adds up to further proof that BBY stock is a sell, and that bargain hunting in Best Buy is hazardous to your health.
Best Buy Earnings Details
BBY stock posted second-quarter earnings before the bell that featured a huge 41% decline in net income, down to just $146 million from $248 million in the year-ago period. Sure, the earnings per share were up … but that’s just a trick of the math.
The top line was equally painful for Best Buy, including a 3.2% decline in sales to $8.9 billion from $9.2 billion in the same quarter a year ago. That missed Wall Street forecasts of $8.99 billion.
CEO Hubert Joly tried to put a positive spin on the Best buy earnings, noting that while its store traffic was down, the customers who came in were more likely to make a purchase. And there’s the cold comfort of knowing that BBY stock is actually enjoying a smaller decline in sales than some peers.
Still, the earnings prove Best Buy stock is not an investment with a bright future.
How to Trade BBY Stock After Earnings
Look, little of this is news. After Best Buy reported horrific holiday sales, the retailer tanked more than 20% in short order back in January. Since then, Best Buy stock has clawed back much of what it lost … but the underlying problems remained for BBY.
As we once again approach the all-important holiday season, I wouldn’t make this the time to get cute with the embattled retailer. BBY stock has snapped back about 45% from its January lows, and it’s time to get while the getting is good.
The forward price-to-earnings ratio on Best Buy is now about 13 — fairly valued in the eyes of some, but given the negativity around BBY stock, I wouldn’t bet too much on the idea that it can’t fall back to a single-digit earnings multiple.
Be very careful of the notion that Best Buy “has” to move higher … the same notion about retailer Sears (SHLD) has left many portfolios in shamble. And even the big guys like Target (TGT) and Walmart (WMT), which clearly aren’t going bankrupt, have led investors to big underperformance lately.
If we have another ugly holiday season, BBY could easily wind up back in the low $20s … so if you rode this stock higher, now’s the time to get out.
If you’re adventurous: Why not consider buying near-the-money puts on BBY stock? The Jan 17, 2015 BBY puts with a strike price of $29 are selling for $1.69 right now, and a modest move down could net a decent gain in about five months.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.