Almost a month ago, I made the case for buying some Best Buy (BBY) stock as it retested its 2009 lows. BBY proceeded to rally 5%, break to marginal new lows in early September, break those lows on an intraday basis after reporting apparently disappointing earnings, and now a fresh rally. The post-earnings rally has caught my attention, suggesting to me that a bottom is firming up for Best Buy.
*Chart created using TeleChart
The stock’s 5-week churn around the 2009 lows looks like an attempt to form a bottom at critical support. Sellers had perhaps their best opportunity to break this support in the post-earnings sell-off. Instead, buyers immediately arrived to not only erase the losses but also to take BBY right back to the top of the current trading range. With the 50DMA looming directly overhead, the onus of proof goes right back to the buyers. A breakout over this resistance should finally establish a convincing bottom with buying volume providing the finishing touches.
“Best Buy Gets Squeezed” in the Wall Street Journal details the litany of problems Best Buy faces. Most notably, analysts are increasingly skeptical that Best Buy’s model mixing large retail stores and an online presence can continue to compete with the likes of Amazon.com and smaller retail outlets that focus on mobile devices. A weakening economy and softening consumer spending present even stronger headwinds…
“The world’s largest electronics chain reported a 30% drop in quarterly profit and saw its stock decline after saying sales at its U.S. stores open at least 14 months dropped for the fifth-consecutive quarter. While the retailer said it gained market share in smartphones and tablets—the hot growth categories in electronics retailing—those gains fell short of offsetting declines in its old cash cows, sales of televisions and computers. Best Buy also cut its full-year earnings forecast, saying it expected tough consumer spending trends to continue through the holidays…Executives earlier this year set plans to cut the company’s big-box square footage by 10% over the next five years as leases expire, but company critics want the retailer to close underperforming stores faster.”
So, it is easy to blame this kind of news for the decline in the stock, but how about the rapid recovery? Are the concerns over? Probably not. But perhaps sellers are finally exhausted and pessimism has run its course on the stock. In the background, Best Buy is repurchasing stock. Over the past two fiscal quarters, BBY has spent $863M on 29.2M shares for an average purchase price of $29.55. That is currently a 14% loss. Management’s credibility is certainly on the line here, and, for now, I am going to bet with them.
Be careful out there!
Full disclosure: long BBY