Will Best Buy Stock Burn the Bears After Earnings?

BBY shares have a promising setup on the charts ahead of earnings

May 19, 2017 at 1:43 PM
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Retail stock Best Buy Co Inc (NYSE:BBY) has been outperforming its sector peers over the past year, up 58% year-over-year to trade at $51.29, while hitting a 10-year high of $52.67 on April 27. Pulling back from this high has put BBY stock within one standard deviation of its rising 40-day moving average, a setup that's been very bullish for the shares in the past. In fact, Best Buy stock has averaged a one-month gain of 2.5% the past eight times it's come near this trendline. 

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Best Buy Options Traders Expect a Big Post-Earnings Move

With the electronics retailer scheduled to report earnings before the open next Thursday, May 25, this promising technical situation could help fuel a favorable post-earnings outcome. While BBY shares moved lower in the session after last quarter's report, the two previous quarters saw the stock gain 13.7% and 19.6%, respectively, the day after earnings. The options market is pricing in a rather large 10.3% swing for next Thurday's session, regardless of direction. 

BBY Puts Remain Popular

We've previously noted Best Buy stock's contrarian value, and little has changed on Wall Street. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the shares have accumulated a put/call volume ratio of 1.60, which is higher than 70% of comparable readings from the past year. This action is continuing today, with puts trading at three times the normal pace. As it stands now, BBY put open interest ranks in the 83rd annual percentile. 

From a historical volatility perspective, however, it doesn't appear to be a terrible time to buy BBY options -- especially with earnings quickly approaching. For instance, the equity has Schaeffer's Volatility Index (SVI) of 41%, which ranks below 73% of readings from the past year, hinting at muted volatility expectations for near-term options. 

Short Interest Remains Elevated on Best Buy Stock

Options traders aren't the only ones bearish on BBY shares. Short interest represents over 13% of Best Buy's float, which would take two weeks to cover, at average trading volumes. Plus, analysts remain bearish. Just five of 14 covering brokerage firms recommend buying the stock, and the shares are already trading above their average 12-month price target of $48.10. It's easy to imagine an earnings beat prompting bullish notes for analysts. 

 

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