Best Buy Co Inc: BBY Swamped by Retail Malaise

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Retailers are getting beat silly this earnings season, with Target Corporation (TGT) the latest casualty. As a result, the situation looks grim for big-box retailer Best Buy Co Inc (BBY) and BBY stock as the company prepares to release its own quarterly report next Tuesday.

Best Buy Co Inc: BBY Stock Swamped by Retail MalaiseExpectations are already quite low for Best Buy’s report. Wall Street is expecting earnings to fall 5.4% year-over-year to 35 cents per share, with revenue off 3.1% at $8.29 billion. Still, there are some in the brokerage community who are looking for an earnings beat, with EarningsWhisper.com reporting a first-quarter whisper number of 38 cents per share.

As a whole, however, analysts remain quite bearish on BBY stock. According to Thomson/First Call, BBY has attracted nine buy ratings, compared to 12 holds and two sell ratings. That said, the TGT-driven selloff has created a cushion between BBY stock and the consensus price target of $34.44, which now represents a premium of 12% to the shares’ Wednesday close.

As bearish as analysts are, however, options traders have them beat in spades.

For instance, the current May/June put/call open interest ratio arrives at 2.99, with puts nearly tripling calls among near-term options.

The real pessimism surrounds Best Buy’s earnings report, however, with the weekly May 27 series put/call OI ratio coming in at a whopping 6.35.

05-19-2016 BBY Stock
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Driving this outsized ratio are more than 22,000 puts open at the May 27 series $30 strike put, which closed with an ask of $1.25, or $125 per contract, on Wednesday. Peak call OI, on the other hand, pales in comparison, with 1,774 contracts open at the $32.50 strike.

Overall, weekly May 27 series options implieds are pricing in a potential post-earnings move of about 9.7% for BBY stock. This places the upper bound at $33.99, while the lower bound lies at $28.01. Technically, BBY is hovering just above key support at $30, while technical resistance emerges in the $34 region.

2 Trades for BBY Stock

Call Spread: With BBY stock trading near oversold levels following the Target beatdown, I’m inclined to bet on a post-earnings bounce — or at least a recovery rally heading into Best Buy’s quarterly report. Traders looking to bet against the grain on BBY stock might want to consider a June $32.55/$33.55 bull call spread.

At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $32.85, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if BBY stock closes at or above $33.55 when June options expire.

Puts Spread: That said, guidance has not been kind to the retail sector, and BBY stock could still have some downside left if forward-looking numbers are weak. Traders looking to follow the bearish crowd on BBY stock might want to consider a June $28.55/$29.55 bear put spread.

At last check, this spread was offered at 35 cents, or $35 per pair of contracts. Breakeven lies at $29.20, while a maximum profit of 65 cents, or $65 per pair of contracts, is possible if BBY stock closes at or below $28.55 when June options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/bby-stock-best-buy-retail/.

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