Wall Street is setting records even in the S&P 500, and the retail sector has recently fallen back into favor. We’ve seen new highs in stocks that we thought were dead not too long ago. However this morning Best Buy (NYSE:BBY) stock has fallen 5% on its earnings headline.
Management actually beat expectations on sales and profitability. But as is often these days, they disappointed with the forward guidance. So investors are showing their disappointment.
Moreover, the growth rate of Best Buy’s online sales declined for the second quarter in a row. This is another hot button area for retail stocks. Investors are obsessed with growing online sales. But I think in BBY’s case this is misguided.
The company is carving a niche to compete with Amazon (NASDAQ:AMZN). Best Buy is the place where shoppers can actually touch the tech before they buy it, and perhaps get help choosing what they actually need. This is something Amazon cannot do yet.
So to me a miss on online traffic is not a concern at this point for Best Buy stock. In fact, in other retail stocks like Macy’s (NYSE:M), for example, a growth in online sales is merely their own foot-traffic sales moving online. They are not taking back sales from AMZN.
If the markets don’t correct then BBY stock will shrug this dip off, so this is a knife I can cautiously catch. Since stocks in general are at all-time highs, my conviction in higher prices for the stock is low. However I have strong faith in the fact that proven support will hold through 2018. And therein lies the opportunity.
In today’s setup, I use options to sell downside risk against what other people fear. This is an opportunity to generate income without any out-of-pocket expense. But if BBY falls below my level of risk than I own the shares at a 20% discount from this morning’s already-lower price. I am confident that in the long term I can manage out of the risk for a profit.
Fundamentally, BBY stock is not expensive with a 19 price to earnings ratio. Technically, it came into the earnings event up almost 20% in the past three months. This is equal to Amazon’s performance for the same period. So a dip on the headline event is normal price action and doesn’t change the actual fundamentals that are currently in the stock.
Most Wall Street analysts have the stock as a HOLD so there is little chance of them downgrading it further. Although we could see a few price target changes but nothing is imminent so the headline risk is favorable to bulls for the mid term.
BBY Stock Trade
The Trade: Sell BBY DEC $60 naked put and collect $1 to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if price falls below my strike then I accrue losses below $59.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell BBY DEC $62.50/$60 bull put spread where I have the same odds of winning. Then the spread would yield 15% on risk.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need BBY stock to hold its support for the next few months.
Click here for more of 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.
