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This Morning’s Flash Sale on Best Buy Co Inc Won’t Last — Grab Some

Wall Street's disappointment in BBY earnings report is misguided. Profit from their error.

By Nicolas Chahine, InvestorPlace Contributor

Best Buy Co Inc (BBY) Stock Fairly Valued and Poised for a Bright Future

Source: Austin Kirk via Flickr

Best Buy Co Inc (NYSE:BBY) reported earnings this morning and management beat on all metrics. Most impressive was that they delivered comp sales that were more than double expectations.

Yet the stock fell 6% on the headline. The story’s the same, management guidance for the next quarter was muted and Wall Street is looking to be wowed. Also investors wanted stronger online sales, but I think they are wrong here. Part of BBY’s success is the fact their physical presence — that’s their ace against Amazon.com, Inc. (NASDAQ:AMZN). So this doesn’t concern me too much as long as they delivering comp sales this strong.

So this is a case of lofty expectations driving an emotional trade — and therein lies the opportunity. I believe this negative reaction will abate over time, and the stock should continue its upward momentum.

BBY is a company that I had written off at the height of the Amazon onslaught. I personally no longer shop there, but results show that enough people do. The stock is near its all-time highs. The stock markets are also near all-time highs, so this makes me want to put my BBY bullish thesis into action using options rather than risking my money to buy the shares out right.

Using options allows me to build a buffer between the current price and my risk levels. This way, should we have more negative tariff headlines and market-wide swoons, I wouldn’t need to sweat the small dips. The trick is to find appropriate levels that would allow for some flexibility and pricing over the next few months.

Coming into this earnings report, Best Buy stock was up 10% so this morning’s dip will damage the rally but not yet break the trajectory. It is still outperforming the markets in general, and that’s a the statement of confidence from Wall Street .

Yet most analysts have a hold rating on the stock. It is now trading near the average of their price targets so there is room to go.

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But from here, BBY stock will need the help of the markets in general. Fundamentally, it is not screaming cheap. It sells at a 20 price-to-earnings ratio, which is not terribly expensive so it won’t be a major financial mistake to own the shares especially if it is at a discount from current price. This is important to today’s trade.

Technically, the stock has been trading in a wide range in 2018. Even with this morning’s dip it would still be at the upper end of that range, so it might have a little bit further to go before it finds footing. $70 per share was the pivot point from which they broke out in January, so I expect it to be a support zone on the way down. $63 per share is the center of another zone of contention which dates back to last June.

BBY Stock Trade Ideas

The Trade: Sell the BBY Sep $60 naked put and collect $1.75 to open. Here I have a 80% theoretical chance that I would retain maximum gains, but if the price falls below my strike then I accrue losses below $58.25.

Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.

The Alternate Trade: Sell the BBY Sep $60/$55 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.

Click here for more my market thesis and get an ongoing free copy of my weekly newsletters.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

Article printed from InvestorPlace Media, https://investorplace.com/2018/05/this-mornings-flash-sale-on-best-buy-co-inc-wont-last-grab-some/.

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