Where Will Best Buy Go Post-Earnings?

With shares of Best Buy (NYSE:BBY) trading around $27, is BBY an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Best Buy is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances, and related services. The company operates retail stores and call centers, and conducts online retail operations under a range of brand names like Best Buy, Best Buy Mobile, the Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Pacific Sales, and the Phone House. Best Buy operates in two segments: domestic and international.

Best Buy apparently told about 2,000 managers around the United States on Wednesday that they were being laid off, a move that would be the company’s biggest job reduction since July 2012 as it continues to cut costs following a weaker-than-expected holiday season. The layoffs will affect about 1.4 percent of Best Buy’s 145,000-person workforce, the Star Tribune learned. The news came a day before the company’s scheduled announcement of fiscal fourth-quarter results. The Richfield-based electronics retailer is expected to report a profit of about $1 per share, a reversal from a loss of $1.21 a share a year earlier. But Best Buy executives began facing questions about the sustainability of the company’s recovery after issuing its holiday sales results last month, in which it disclosed that sales at stores open for at least a year fell 0.9 percent during a nine-week period from November to early January. Investors and analysts were expecting a small gain in same-store results.

At the time, Best Buy Chief Executive Hubert Joly called the performance a “speed bump” and reiterated previous statements that the company’s “transformation” was in its early stages and would take a long time. “It doesn’t change the overall story,” Joly said. However, he also said the company would accelerate its effort to lower costs. In a first step in that direction, Best Buy in late January cut about 950 jobs in Canada, about 6 percent of its workforce there. The layoff on Wednesday was first reported by the New York Post, which cited an anonymous source and reported that, “Affected workers are mostly in middle management.” Best Buy declined to comment.

T = Technicals on the Stock Chart Are Mixed

Best Buy stock has been pulling back in recent times. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Best Buy is trading below its rising key averages which signal neutral to bearish price action in the near-term.

BBY

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Best Buy options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Best Buy options

40.05%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Steep

Average

April Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Best Buy’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Best Buy look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-15.65%

633.33%

23.08%

95.11%

Revenue Growth (Y-O-Y)

-3.02%

-0.20%

-11.82%

-19.21%

Earnings Reaction

6.39%*

-10.97%

13.24%

-4.36%

Best Buy has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Best Buy’s recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has Best Buy stock done relative to its peers, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Wal-Mart (NYSE:WMT), and sector?

Best Buy

Amazon

Apple

Wal-Mart

Sector

Year-to-Date Return

-31.70%

-10.30%

-6.76%

-5.48%

-6.51%

Best Buy has been a poor relative performer, year-to-date.

Conclusion

Best Buy is a provider of electronics and related products and services to consumers and growing companies worldwide. The company apparently told about 2,000 managers around the United States on Wednesday that they were being laid off. The stock has been pulling back in recent times, but is currently surging higher. Over the last four quarters, earnings have been increasing and revenues have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Best Buy has been a poor year-to-date performer. WAIT AND SEE what Best Buy does this quarter.

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