Making a Contrarian Case for Best Buy Ahead of Earnings

Analysts have been stubbornly bearish on BBY in recent years

by Karee Venema

Published on Feb 28, 2018 at 10:49 AM
Updated on Jun 24, 2020 at 10:16 AM

Best Buy Co Inc (NYSE:BBY) is scheduled to report fourth-quarter earnings ahead of tomorrow's open. Retail earnings have been coming in hot this week, with shares of Macy's (M) and Etsy (ETSY) gapping higher post-earnings. Although BBY stock has a recent history of negative earnings reactions, there's plenty of skepticism priced into the outperforming retail shares -- and a rare earnings win could spark a big surge.

In the options pits, for instance, the weekly 3/2 75-strike and March 72.50 puts are two of BBY's top open interest positions. Data from the major options exchange confirms buy-to-open activity at each strike, meaning speculators are betting on BBY to retreat below the respective strikes over the next few weeks.

This skepticism is seen elsewhere, too. Although short interest fell 6.2% in the most recent reporting period, there are still 23.23 million BBY shares sold short -- or 7.3 times the stock's average daily pace of trading. An earnings win could shake some of the weaker bearish hands loose, which could possibly create tailwinds for Best Buy shares.

Plus, despite BBY stock outperforming the S&P 500 Index (SPX) over the last six years, analysts have become increasingly bearish toward the shares, according to Schaeffer's Senior Quantitative Analyst Rocky White. Currently, a slim 29% of analysts maintain a "buy" rating on BBY -- down from 40% since October 2011. This leaves the door wide open for a round of upgrades to draw more buyers to the table.

And while history doesn't favor BBY's post-earnings price action -- the stock has closed lower in the session after reporting in three of the past four quarters -- it's been in a long-term uptrend. Year-over-year, Best Buy shares have surged 65%. More recently, a pullback from the stock's Jan. 23 record high of $78.59 was neatly contained by its 50-day moving average, with the equity up 1.5% today to trade at $72.60.


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