Can Best Buy Continue Its Path of Rising Prices?

With shares of Best Buy (NYSE:BBY) trading around $35, 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 founder and biggest shareholder Richard Schulze is selling some of his stake in the company in a move to help diversify his assets and raise money. Schulze owns 21 percent of the company. He can sell his shares between October 1 of this year and March 2014. Shares in the electronics retailer have doubled in the last year under the leadership of Chief Executive Officer Hubert Joly.

T = Technicals on the Stock Chart are Strong

Best Buy stock has been exploding higher over the last several years. The stock is now trading near highs for the year 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 above its rising key averages which signal neutral to bullish 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

40.87%

43%

42%

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

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

23.08%

95.11%

-107.14%

-91.49%

Revenue Growth (Y-O-Y)

-11.82%

-19.21%

-5.23%

-3.59%

Earnings Reaction

13.24%

-4.36%

4.57%

-13.01%

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

P = Excellent 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

195.30%

12.30%

-6.29%

6.95%

11.57%

Best Buy has been a relative performance leader, year-to-date.

Conclusion

Best Buy is a provider of electronics and related products and services to consumers and growing companies worldwide. The company is allowing its biggest shareholder to book gains by selling stock  after a recent powerful run this year. The stock has been surging higher and is currently trading at highs for the year. Over the last four quarters, investors have had mixed feelings as earnings have been mixed and revenues have been decreasing. Relative to its peers and sector, Best Buy has been a year-to-date performance leader. Look for Best Buy to continue to OUTPERFORM.

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