Best Buy (BBY) Overbought and Overloved Ahead of Earnings

Best Buy Co., Inc. (BBY) reports second quarter 2020 earnings next week, with analysts expecting a profit of $1.07 per share on revenue of $9.35 billion. The stock fell more than 4% after Best Buy beat top- and bottom-line first quarter 2020 estimates in May but recovered quickly and is now trading at an all-time high. The company offered a bullish second quarter sales update in July, looking for a year-over-year increase of 2.5%. It also noted that online sales had grown over 250% year over year through July 18, underpinned by strong computing, appliance, and tablet demand.

Key Takeaways

  • Best Buy is benefiting from strong computer, mobile device, and appliance sales.
  • The stock broke out in July and is trading at an all-time high.
  • Outsized gains into August raise the odds for a sell-the-news reaction after the Aug. 25 earnings report.

The COVID-19 pandemic has turned lemons into lemonade for select retail groups, with socially distant customers using stimulus checks to upgrade kitchens, bathrooms, appliances, personal computers, and mobile devices at a rapid pace. Looking ahead, the release of next-generation game consoles in the fourth quarter should underpin demand in this formerly lagging segment, adding to Best Buy income well into 2021.

Wall Street still hasn’t jumped on the bull train, with a “Moderate Buy” consensus based upon eight “Buy” and eight “Hold” recommendations. That hasn’t stopped the retailer’s stock from jumping 57% in the second quarter and adding 29% so far in the third quarter. Price targets currently range from a low of $85 to a Street-high $130, while the stock opened Friday’s session $6 above the median $106 target. This placement warns that fresh upgrades may be needed to support additional gains.

An upgrade refers to the positive change in an analyst’s outlook of a particular security’s valuation based primarily on that security’s improving fundamentals.

Best Buy Long-Term Chart (1997 – 2020)

The stock charged higher from a five-year low in 1997, breaking out to a new high one year later. The rally peaked at $39.50 at the start of the new decade, ahead of a bear market decline into the single digits. It bounced back to the high in 2004 but didn’t break out until 2005, posting modest gains into the 2006 high at $59.50. That marked the highest high for the next 11 years, ahead of a 2008 decline to a six-year low in the mid-teens.

A recovery wave into 2010 failed, yielding a downtick that undercut the prior low in 2013. That marked the end of a seven-year downtrend, giving way to a two-legged recovery wave that finally reached the 2006 high in second quarter of 2017. It broke out immediately, booking impressive upside into the August 2018 high at $84.37, and rolled over with broad benchmarks into year end. A December 2019 breakout failed in February 2020, dropping the stock back to the 2018 low.

Best Buy Short-Term Chart (2018 – 2020)

The bounce through the second quarter unfolded at the same trajectory as the prior decline, completing a 100% V-shaped recovery pattern in July. It gapped up in the next session, breaking out to a new high and adding 21 points into Friday’s opening bell. The second quarter sales update triggered the breakout and rally, raising the odds that quarterly results have now been “baked into” the stock price. In turn, that raises the odds for a sell-the-news reaction after next week’s confessional.

A benchmark is a standard against which the performance of a security, mutual fund, or investment manager can be measured. Generally, broad-market and market-segment stock and bond indexes are used for this purpose.

The Bottom Line

Best Buy stock recovered quickly after the first quarter’s pandemic swoon and broke out to an all-time high in July. It has added another 20-plus points since that time, setting off extremely overbought technical readings that raise the odds for a selloff or trading range after the Aug. 25 earnings release.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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