The Contrarian Blog

Don't Buy Best Buy

by Jim Cunningham 4/4/2012 12:20 PM
Stocks quoted in this article:
Publication: "Barron's"
Publication title: "Best Buy Isn't Your Best Bet "
Publication Date: 3/29/2012
Brief Summary:

This article approaches Best Buy Company (BBY) from a downbeat angle. Citing lower-than-expected fiscal fourth-quarter revenue, and a larger-than-expected dip in same-store sales, the author believes that BBY has a lot of work to do keep itself from extinction (a la Circuit City). Problems are mounting for the world's largest electronics retailer, as BBY has thrown into action a three-year, $800-million cost reduction plan. But as one analyst sees it, "They are trying to save their way to prosperity and that is hard for a big-box retailer." Even though BBY's CEO is looking for 2016 to bring a combined $8 billion in online sales from both the U.S. and China, the author suggests that a recent observation about the beleaguered business has remained an ugly truth: "Late last year, we warned that the retailer had become a showroom of sorts for people who check out items in person at Best Buy but ultimately shop at rivals like Amazon.com (AMZN), Costco Wholesale (COST), Target (TGT) and Wal-Mart (WMT)."

Contrarian Takeaway:

BBY has been stagnant on the charts during 2012, holding its head slightly above breakeven. Things look worse from a longer-term perspective, as the shares have suffered a roughly 18% 52-week drop. In fact, the stock has lagged the broader S&P 500 Index (SPX) by more than 13% over the past three months. Since mid-July 2011, BBY has bounced between support at the $22-$23 region, and resistance at the $28-$29 area.

In light of this lackadaisical price action, it's not surprising to see such a glut of negativity surrounding BBY. According to Zacks, 76% of analysts have slapped the stock with a "hold" or "sell" recommendation. To boot, short interest jumped 12.1% during the past two reporting periods, and now accounts for 17.1% of the equity's available float. At BBY's average pace of trading, it would take over two weeks for all these shorted shares to unwind.

Even the options pits are doused in pessimism. During the past two weeks, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.18 puts for every call. This ratio ranks above 79% of all other readings taken during the past year, suggesting that traders on these exchanges have bought bearish bets over bullish at a faster clip than usual during the past couple of weeks. Plus, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.29 is at an annual pessimistic peak, suggesting that short-term speculators have never been more negatively aligned toward BBY during the past year.

Considering BBY's lackluster fundamental and technical performance, this negativity seems appropriate. Unfortunately, in the near term, the bears will likely find little motivation to spark a change of heart toward the retailer.


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