This Retail Stock Looks To Close Out Earnings Season With a Bang

BBY stock is up 56% year-over-year

Patrick Martin
Aug 25, 2017 at 3:31 PM
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Retail stock Best Buy (NYSE:BBY) is the last of the big-name retailers to report second-quarter earnings on Tuesday morning. There have been some major misses for the retail sector during this earnings season, with rival GameStop the latest victim today. Best Buy stock has historically had success in post-earnings sessions, but there's evidence of skepticism toward the retailer ahead of the quarterly event.

The retail stock has averaged a one-day move in either direction of 10.5% in the session following its last eight earnings releases, per Trade-Alert. Furthermore, this move has been positive five of the last eight times, including a 21.5% pop back in May. This time around, the options market is pricing in an even bigger one-day swing of 11.6%. 

Another post-earnings rally could propel Best Buy stock to uncharted territory, past the $63.32 record high it touched yesterday. While the retail stock is currently up just 0.1% today to trade at $61.84, it is up a whopping 56% year-over-year.  The shares have been ushered higher by support at their 20-day, 40-day, and 80-day moving averages throughout this period.

However, Wall Street sentiment skews bearish on BBY. Of the 14 brokerages covering BBY stock, nine rate it a "hold" or "sell." This means there is ample room aboard the BBY bandwagon for upgrades.

Despite Best Buy stock's recent run, there remains a great amount of capital tied up in BBY shorts. The 32 million shares currently sold short represent 12% of BBY's total available float. It would take more than 11 days for short sellers to cover their pessimistic positions. Should history repeat itself and BBY deliver an earnings beat, a short-squeeze rally could push the stock to new heights.

Looking at the options pits, short-term options traders are more put-skewed than usual toward the stock. This is evidenced by BBY's Schaeffer's put/call open interest ratio (SOIR) of 2.58, which ranks in the 83rd percentile of its annual range.

But drilling down, peak open interest of 15,498 contracts is found at the deep out-of-the-money September 47 put. Most of the open interest here was added across two pre-earnings days in mid-May, shortly before the aforementioned 21.5% surge higher on May 25.

At the time of these big put additions, BBY was trading just north of $51 per share, and the options changed hands for around $2.30 apiece. On the day of that big earnings bull gap, though, the September 47 put closed at just $0.71, as BBY popped above the $60 level. Given the magnitude and immediacy of the paper loss on the trade, it's quite likely that the speculator who added these puts has long since given up on the trade -- and if short sellers follow suit by throwing in the towel on BBY, it could help the retailer extend its somewhat unlikely uptrend.

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