Will Best Buy Continue Its Recovery?

With shares of Best Buy (NYSE:BBY) trading around $26, 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, such as 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. Electronic products hold the interest of consumers and companies worldwide and will continue to do so. As economies around the world develop, Best Buy is poised to provide the products and services consumers demand. However, in order for Best Buy to see huge success, it must be able to successfully compete against its online competitors.

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T = Technicals on the Stock Chart are Strong

Best Buy stock is seeing a powerful bounce after a few years of increased selling. The stock has more than doubled just this year and looks to continue this euphoric rise. 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

69.54%

86%

84%

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

June Options

Flat

Average

July 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 very 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

75.35%

-107.14%

-91.49%

31.43%

Revenue Growth (Y-O-Y)

38.12%

-5.23%

-3.59%

-26.20%

Earnings Reaction

4.57%

-13.01%

-1.37%

1.59%

Best Buy has seen mixed earnings and revenue figures over the last four quarters. From these figures, the markets have been a bit confused with Best Buy’s recent earnings announcements.

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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

122.2%

6.89%

-19.04%

16.74%

23.25%

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

Conclusion

Best Buy provides highly demanded electronic products and services to consumers and growing companies worldwide. The stock is seeing an incredible bounce after a few years of significant selling pressure. Earnings and revenue figures are improving, but investors expect more from the company. Relative to its peers and sector, Best Buy has led by an extremely wide margin. Look for Best Buy to OUTPERFORM.

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