As earnings season begins to winds down, there are still quite a few major reports worth keeping an eye out for. Best Buy (BBY), for one, will step into the earnings confessional ahead of the open on Tuesday, Aug. 25.
BBY has struggled this year, even as the company looks to continue its turnaround plans. But the Best Buy stock price recently bounced off a multi-month low, giving traders some hope that earnings could help extend the short-term rally.
By the numbers, Best Buy is expected to post a profit of 34 cents per share for the second quarter — down from the year-ago figure of 44 cents. Revenue, meanwhile, is expected to slip 7% to $8.3 billion.
Historically, the company has performed extremely well in the earnings limelight. In fact, Best Buy has topped the consensus estimate in each of the past 10 quarters. Naturally, the brokerage community appears to be anticipating another beat on Tuesday, with EarningsWhisper.com reporting a second-quarter whisper number of 39 cents per share.
A Closer Look at BBY
Despite poor price action from Best Buy stock, the brokerage community remains quite bullish on the shares. According to Thomson/First Call, BBY stock has attracted 15 “buy” ratings, compared to nine “holds,” and one “sell” rating. Additionally, the 12-month consensus price-target of $43 represents an elevated premium of about 33% to Best Buy stock’s close at $32.23 on Wednesday.
Short sellers remain quite bearish on BBY stock, but the landscape appears to be shifting. Specifically, the number of BBY shares sold short dropped by 11% during the most recent reporting period. However, the remaining 31.2 million shorted shares still account for a hefty 10% of the stock’s total float — more than enough to spark a covering rally in the event of a strong quarterly earnings report.
Short sellers may also be taking precautions ahead of Best Buy’s report. Currently, BBY’s August/September put/call open interest ratio arrives at a typically bullish reading of 0.52. This ratio plunges to 0.26 for the weekly August 28 series, with calls nearly quintupling puts among options set to expire at the end of next week — the options most affected by Best Buy’s coming earnings report.
Click to Enlarge Overall, weekly August 28 series options implieds are pricing in a potential post-earnings move of about 7.6% for Best Buy stock. This places the upper bound at $34.97, while the lower bound lies at $30.03.
Technically, a rally would place BBY stock above all its major short-term moving averages save its 200-day trendlline, and a breakout above $35 could quickly help the shares eclipse this moving average as well.
On the downside, BBY should find support in the $30 region, though a breach of this region could confirm the stock’s intermediate-term downtrend and exacerbate losses.
2 Trades for BBY Stock
Call Spread: With an earnings beat likely in the cards, and BBY stock only facing one significant short-term technical hurdle, the path of least resistance for Best Buy’s stock price appears to be higher. As such, traders looking to bet on a post-earnings BBY bounce might want to consider a September $32.49/$35.49 bull call spread.
At the close of trading on Wednesday, this spread was offered at 83 cents, or $83 per pair of contracts. Breakeven lies at $33.32, while a maximum profit of $2.17, or $217 per pair of contracts, is possible if BBY closes at or above $35.49 when September options expire.
Put Sell: On the other hand, retailers continue to struggle, especially with overseas currency translations factoring in poorly. Those with a bullish-to-neutral bias on BBY might consider a weekly August 28 series $30 put sell position.
After the close last night, the August $30 put was bid at 57 cents, or $57 per contract. The upside to this put sell strategy is that you keep the premium as long as BBY stock closes above $30 when these options expire at the end of next week. The downside is that should BBY trade below $30 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $30 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
