After a strong showing at the end of last week, Target Corporation (NYSE:TGT) raised a few warning flags yesterday when it lowered its full-year guidance. However, Wal-Mart Stores, Inc. (NYSE:WMT) is helping to belay those fears this morning, beating estimates and boosting guidance. The stage is now set for big-box electronics retailer Best Buy Co Inc (NYSE:BBY), as the company prepares to release its quarterly report next Tuesday.
Click to Enlarge Best Buy stock has had a volatile year so far, bouncing between support near $30 and resistance at $35. BBY’s latest rally was cut short just as the shares appeared ready to break out above $35. Target’s poor earnings reception led to a nearly 3% haircut for Best Buy stock in sympathy.
But BBY needed a bit of a blow-off ahead of its quarterly report, as the shares were nearing overbought levels. As a result, Best Buy stock now has a bit more room to run heading into next week.
Turning toward earnings, Wall Street is expecting Best Buy earnings to fall about 14% year-over-year to 43 cents per share. Revenue is seen slipping 1.6% to $8.4 billion. However, EarningsWhispers.com reports a whisper number of 48 cents per share for Best Buy. Hitting this target could provide the boost BBY stock needs to finally leave $35 in the rearview.
Outside the whisper number, analysts are quite bearish on Best Buy stock. According to Zacks data, 10 of the 14 analysts following BBY rate the shares a “hold” or worse. Furthermore, the 12-month price target of $32.91 represents a discount to yesterday’s close. As you can see, there is plenty of room for potential upgrades or price-target increases … as long as Best Buy doesn’t pull a Target.
Short sellers have also upped their bearish game, with the number of BBY shares sold short rising by 3% in the most recent reporting period. As a result, 32.2 million shares of Best Buy stock are now sold short, representing about 11.5% of BBY’s total float and creating the potential for a short-squeeze situation.
Pessimism is also prevalent for Best Buy Stock among short-term options traders. Currently, the August/September put/call open interest ratio arrives at 0.83, with puts and calls in near parity. While this may seem benign, the weekly August 26 series ratio balloons to 1.49, as bearish sentiment is thick among options most affected by next week’s quarterly report.
Overall, weekly August 26 series options implieds are pricing in a potential post-earnings move of about 7.1% for Best Buy stock. This places the upper bound at $35.62, while the lower bound lies at $30.88.
2 Trades for Best Buy Stock
Call Spread: With Walmart bolstering confidence in retail again following Target’s lackluster report, I’m inclined to bet on a post-earnings bounce for Best Buy stock. Traders looking for a contrarian play for BBY might want to consider a September $34.55/$35.55 bull call spread.
At last check, this spread was offered at 31 cents, or $31 per pair of contracts. Breakeven lies at $34.86, while a maximum profit of 69 cents, or $69 per pair of contracts, is possible if Best Buy stock closes at or above $35.55 when September options expire.
Puts Spread: On the other hand, if Best Buy pulls a Target and lowers guidance heading into the holiday shopping season, all bullish bets are off. Traders looking to follow the bearish crowd on BBY stock might want to consider a September $32.55/$31.55 bear put spread. At last check, this spread was offered at 40 cents, or $40 per pair of contracts.
Breakeven lies at $32.15, while a maximum profit of 60 cents, or $60 per pair of contracts, is possible if BBY stock closes at or below $31.55 when September options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.