Shares of Best Buy Co Inc (NYSE:BBY) are chomping at the bit to break out. The question is, does Best Buy stock have what it takes? With the retailer carrying the highly sought after iPhone from Apple Inc. (NASDAQ:AAPL), it just might.
Perhaps with little surprise, BBY stock has been rather volatile this year. It’s not easy being a traditional retailer in a world were Amazon.com, Inc. (NASDAQ:AMZN) is dominating more and more each day. What is surprising, though, is that Best Buy could report fourth-quarter earnings in line with estimates, miss on revenue and disappoint on guidance and still see its stock go higher.
What’s more, the company missed comparable-store sales estimates for the quarter. Fourth-quarter revenue guidance of $14.25 billion (at the midpoint) was short of the $14.36 billion analysts were looking for. Earnings per share guidance of $1.94 (at the midpoint) came up short of the $2.03 estimate.
So what gives?
Management said natural disasters, particularly the hurricanes, negatively impacted sales, comps and earnings. No surprise there. BBY management also said that a “major new phone” did not launch and that hurt sales as well. That major new phone is the iPhone and now that it’s out, sales should be humming.
iPhone’s Impact on Best Buy
It’s hard to estimate what impact the iPhone will have on Best Buy’s top and bottom line. I remain of the opinion that U.S. consumers are strong and feeling more emboldened than investors give them credit for. That’s as the economy continues to hum along and consumer confidence is consistently high.
In a nutshell, I don’t think many consumers will be holding back this year — be it on a new iPhone or in other areas of retail. That said, one can purchase an iPhone in many different places. Buying from the carrier, like T-Mobile Us Inc (NASDAQ:TMUS) — which may have won the telecom holidays — AT&T Inc. (NYSE:T) or Verizon Communications Inc. (NYSE:VZ) makes a lot of sense. Or consumers could just buy one from Apple directly.
So, Best Buy may not be at the top of the list — but carrying the new device sure won’t hurt. It’s hard to say what the precise impact will be, but I wouldn’t be surprised to see Best Buy top management’s guidance.
Trading Best Buy Stock
This chart is shaping up as a thing of beauty. I’ve made a lot of notes on the chart, but it’s really quite simple. We’re playing for a breakout over $62 and change. A few times since June, Best Buy stock has flirted with the $60 level, only to fall back toward range support between $53 and $54.
Click to Enlarge
Best Buy tested this upper breakout level near $62.50 early in the month, but has since fallen a bit. Importantly, though, it’s holding up above $60. Investors who want to go long can do so here, with a stop-loss on a close below $60.
However, I feel as though the more prudent play would be to buy the breakout. Meaning if Best Buy stock is able to close over $62.50, then investors should buy it.
Will it happen? The beauty of this strategy is that we don’t have to take the risk of finding out. If it happens, we can place our bet after the fact and ride any positive momentum higher. If it’s a fake-out, we can wash our hands with a minimal loss.
The Bottom Line on BBY Stock
There are other positives aside from a potential breakout, carrying the iPhone and entering the lucrative fourth quarter. For starters, Best Buy trades at just 14.4 times forward earnings estimates.
That’s relatively cheap, particularly for a company that is forecast to grow earnings 14.5% this year and another 6% in 2018. BBY stock also has a 2.33% dividend yield. In a nutshell, we have a tempting breakout on the chart, along with a low valuation, decent earnings growth and a yield nearly equivalent to the 10-year Treasury.
Further, Best Buy has a payout ratio of 33%, meaning it has more room to increase its dividend in the future. It can be hard to find a retailer that’s still doing well in the current environment. But BBY stock has been impressive, hovering near 52-week highs. Positive comps, positive growth and a low valuation make BBY a reasonable consideration. It helps too that Black Friday and Cyber Monday set records this year.
Now, let’s see if Best Buy stock can build on that momemtum.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
