Retail markets are in trouble and this poses serious challenges for its industry competitors, including consumer electronics outlet Best Buy Co Inc. (NYSE:BBY).
Adding to the woes of soft economic performance indicators are declining consumer sentiment and poor earnings results from companies targeting discretionary income.
Best Buy earnings — scheduled to be disclosed on Thursday — is the next in line for what is starting to appear like a firing squad. Just ask investors of Wal-Mart Stores, Inc. (NYSE:WMT), which only showed marginal improvement in U.S. sales.
Does BBY still have what it takes to win over the markets where others have failed?
Best Buy’s management team is understandably pensive about presenting too optimistic a picture. The tough retail environment has reduced BBY’s expectations for comparable-store sales in the first quarter of fiscal year 2016, which it forecasts to come in between parity to slightly negative against the prior quarter.
In addition, unfavorable dynamics within the currency exchange markets may negatively affect international sales for BBY, which were already disappointing.
One inarguably bullish factor BBY stock has up its sleeve is momentum. Its fiscal 2015 Q4 performance beat Wall Street expectations by 9.7%, and historically, Best Buy earnings are on a nine-hit consecutive winning streak.
From a casual observer’s perspective, it may not make much sense to bet against the line.
Since May 2014, Best Buy earnings surprises have consistently declined in strength. Furthermore, between May 2013 until this March, the magnitude of BBY stock’s performances one-month after earnings release share a statistically significant correlation of 0.68 with Best Buy earnings magnitude.
Simply put, as the electronics retailer continues to slow down fundamentally, BBY stock in the technical markets is also hitting the brakes.
Year-to-date, BBY is down more than 11% and since peaking in mid-March, shares dropped more than 16% of value. Over the past 90 days, BBY stock’s average performance is -2%, which statistically yields a low 40% probability that shares will move higher over the equivalent time frame.
However, given the stock’s relatively high beta of 3.09, the reward for betting against established probabilities is equally lofty: a cool 23% return.
But for those unwilling to take such a risky gamble, the best course of action is to stay away from BBY stock, especially when its earnings are released. The enormous dark cloud surrounding the retail sector as a whole, as well as negatively correlated fundamental and technical factors, makes Best Buy a bull market for the bears.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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