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Best Buy Stock Is a Strong Trade Ahead of Earnings

Best Buy stock - Best Buy Stock Is a Strong Trade Ahead of Earnings

Source: Austin Kirk via Flickr

In a tumultuous 2018, Best Buy (NYSE:BBY) suffered more than many other stocks. Best Buy stock was down more than 20%, while Walmart (NYSE:WMT) and Target (NYSE:TGT) were barely down. The SPDR S&P Retail ETF (NYSEARCA:XRT) also was flattish and out-performed the S&P 500.

So the 2018 drag on BBY stock is not a general retail problem since those did better than the S&P. Investors clearly have issues with Best Buy. It can’t be a matter of valuation, as BBY stock sells at a price-to-earnings ratio of 15. Compare that to Walmart’s 54. So it is clear that traders are worried about BBY’s prospects.

In 2018 and while equity markets were reeling with fears from tariff and rate hike headlines, consumer spending had been on fire. From that sense, retailers should have done better. The holiday shopping period was stronger than anticipated, especially in the U.S.

BBY is the “last man standing” among electronic brick-and-mortar retailers, yet Best Buy stock is still struggling. Best Buy has made improvements. It was once considered to be the Amazon (NASDAQ:AMZN) showroom store where people could touch the products before they bought it on AMZN.

This is no longer the case.

Consensus now is that BBY and other retailers are finally growing their online sales. In this case, they actually could be taking back some sales from AMZN. BBY is perhaps the only brick-and-mortar doing that. Macy’s (NYSE:M) or J.C. Penny (NYSE:JCP) are not taking back their clients from Amazon; they are merely taking away from their own remaining foot traffic.

Nevertheless, Best Buy stock still faces a huge problem. Recovering its portion of the pie is one thing, but doing it in a profitable matter that is the ongoing challenge. AMZN built its empire on thin margins like Walmart did decades ago. BBY still has to prove it can compete like that on a similarly thin budget.

Onus is on BBY management to prove the viability of this strategy in the long term. So far, Wall Street is not giving them the benefit of this doubt. So I can’t argue for the long-term investment in the stock today. But there still is an opportunity in 2019.

How to Approach Best Buy Stock Today

Technically, Best Buy stock has more upside potential and could retest $65 per share. It has recently had a nice 20% rally off the lows, but it still has more room to go. The idea is that it probably won’t have much resistance until it hits the prior ledge from which it fell apart in early December.

What supports this thesis is that the markets in general are in the process of repairing the crisis of sentiment that we’ve had all second half of 2018. So Best Buy stock will have the benefit of the general market lift to help it get there. The December employment report was extremely strong, so people in the U.S. are employed. So as long as that continues to be true, consumer spending will remain strong and the economy will be fine.

This would be a trading vehicle and I won’t want to turn it into an investment. Meaning I would set appropriate stops below. I would also want to exit before the earnings event. I believe there will be too much uncertainty.

The 2018 holidays were great so BBY management will be under pressure to deliver on expectations. They’d better show it in the result late February. The March options prices are expecting a +/- $10 move up or down on the headline, so my upside target is within reach if I am correct in my thesis. But on the flip side, I should be ready for another dip below $50.

Other than a short-term scalp, I see no specific reason to chase it for the long term. If it cannot rally with record holiday sales, then I’d rather bet on stocks that have growth on their side. For retail I’d rather chase AMZN or  Costco (NASDAQ:COST). These two are up big even when markets have faltered.

Click here and enjoy a free video and 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.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/best-buy-stock-strong-trade-ahead-earnings/.

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