Can Best Buy Stock Rebound?

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 watched its stock plunge more than 27 percent in morning trading Thursday after announcing poor holiday results that suffered from heavy competition and deep discounting. The consumer electronics retailer said revenue for the nine weeks ended Jan. 4 slumped 2.6 percent to $11.45 billion from the same period a year earlier. Same store sales slipped 0.9 percent in the U.S., though they managed at 0.1 percent boost internationally.

In late morning trading in New York, Best Buy stock tanked nearly 28 percent, or $10.45, to $27.11 a share. Hubert Joly, chief executive of the Minneapolis chain, blamed an epidemic of deals, discounts and bargains across the industry. “The promotional intensity that began with Black Friday continued throughout the period, which led us and our competitors to answer one question — do we make the incremental investment necessary to be price competitive and defend our market share?” Joly said in a statement. “For us, there was only one answer.” But the rampant price slashing “did not result in higher industry demand and had a deflationary impact on our revenue,” Joly said.

T = Technicals on the Stock Chart Are Weak

Best Buy stock has been pulling back in recent times. The stock is currently trading at lows for the year and may need time to stabilize before heading higher. 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

51.03%

96%

93%

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

Put IV Skew

Call IV Skew

February Options

Steep

Average

March 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 significant 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

633.33%

23.08%

95.11%

-107.14%

Revenue Growth (Y-O-Y)

-0.20%

-11.82%

-19.21%

-5.23%

Earnings Reaction

-10.97%

13.24%

-4.36%

4.57%

Best Buy has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been disappointed with Best Buy’s recent earnings announcements.

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

-32.70%

-0.02%

-0.92%

-2.38%

-2.10%

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 watched its stock plunge more than 27 percent in morning trading Thursday after announcing poor holiday results that suffered from heavy competition and deep discounting. The stock has been pulling back in recent times and is currently trading at lows for the year. Over the last four quarters, investors have been disappointed as earnings have been increasing and revenues have been decreasing. 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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