Big-box electronics retailer Best Buy Co Inc (NYSE:BBY) will step into the earnings spotlight ahead of the open on Tuesday next week, and expectations are mixed ahead of the event.
For the record, Wall Street is anticipating a profit of $1.36 cents per share from Best Buy, with upward revisions to this target rolling in over the past several weeks. That said, with the recent bankruptcy of competitor RadioShack Corporation (OTCMKTS:RSHCQ), guidance may be the key for Best Buy investors.
Historically, Best Buy has a habit of topping earnings expectations. In fact, the company has topped Wall Street’s targets in each of the past four reporting periods by an average of 42%. This may explain why the company’s whisper number arrives 9 cents higher than the consensus at $1.45 per share, according to EarningsWhisper.com.
Despite repeatedly beating Wall Street’s targets, BBY stock is still down 2.6% from its last quarterly report. Additionally, the shares have shed roughly 4.6% since the start of the year, but have recovered nicely from a mid-January selloff that saw BBY test support in the $34 region.
Technically speaking, BBY stock has recently pulled back to key support at its 50-day moving average after once again being rejected at overhead resistance in the $40 region. BBY stock has not traded north of $40 since the end of 2013.
Turning to the sentiment outlook, the brokerage community has a rather bullish stance on BBY stock. According to data from Thomson/First Call, 19 of the 28 analysts following BBY stock rate it a “buy” or better. However, the 12-month price target of $42 represents a meager premium of about 12% to Thursday’s close at $37.55.
Click to Enlarge Short sellers, on the other hand, have taken out sizeable bets against BBY stock. Currently, some 24.9 million BBY shares are sold short. Representing a respectable 8.2% of the stock’s total float, or shares available for public trading, these short positions could provide fuel for a short squeeze situation should Best Buy benefit from any positive news.
Finally, judging from short-term options activity, these short sellers may be getting a bit nervous. Specifically, BBY’s weekly Mar 6 series put/call open interest ratio rests at 0.53, as calls nearly double puts among options set to expire at the end of next week.
This excitement falls off quite a bit when we pullback to look at the full month of March, where the put/call open interest ratio rises sharply to 1.14.
2 Trades for BBY Stock
Call Spread: Mixed expectations and overhead technical resistance could limit BBY stock’s response to next week’s quarterly report. As such, BBY bulls will want to consider a call spread to maximize their potential returns. Along those lines, a March $37.50/$40 bull call spread has potential.
At last check, this spread was offered at $1.07, or $107 per pair of contracts. Breakeven lies at $38.57, while a maximum profit of $1.43, or $143 per pair of contracts, is possible if BBY stock closes at or above $40 when March options expire.
Put Sell: Alternately, if BBY’s upside potential doesn’t thrill you, then a weekly Mar 6 series $32 put sell might be a viable way capitalizing on technical support. At last check, the weekly Mar $32 put was bid at 11 cents, or $11 per contract.
On the upside, a put sell strategy allows you keep the premium as long as BBY closes above $32 when weekly March options expire at the end of next week. On the downside, if BBY stock trades below $32 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $32 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.