We all love seeing stocks go up. When a stock’s upward trend lasts for several months, a year, or more, that movement usually translates to big-profit, “home run” trades for those who had the sense to jump in early. BBY is a great example of exactly that kind of trade. It’s a stock that, as of this writing is trading only a few dollars per share away from its all-time high and has more than doubled in price over the last two years. If you weren’t one of those fortunate few who saw the opportunity to get in two years ago, but you saw the strength of the stock’s long-term trend, you’d probably be tempted to consider buying in. The question is, how much opportunity is left, and how much risk do you have be willing to accept for whatever upside remains? Let’s take a look.
Fundamental and Value Profile
Best Buy Co., Inc. is a provider of technology products, services and solutions. The Company offers products and services to the customers visiting its stores, engaging with Geek Squad agents, or using its Websites or mobile applications. It has operations in the United States, Canada and Mexico. The Company operates through two segments: Domestic and International. The Domestic segment consists of the operations in all states, districts and territories of the United States, under various brand names, including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, and Pacific Kitchen and Home. The International segment consists of all operations in Canada and Mexico under the brand names, Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad. As of December 31, 2016, the Company operated 1,200 large-format and 400 small-format stores throughout its Domestic and International segments. BBY’s market cap is $20.6 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings decreased by about 36%, while sales grew modestly. It’s generally difficult for a company to grow earnings faster than sales, and in the long term can’t be expected to continue, but it is also a positive sign of management’s ability to maximize their business operations.
- Free Cash Flow: Free Cash Flow has declined since the first quarter of 2017 but remains healthy at more than $1.3 billion over the past twelve months.
- Debt to Equity: the company’s debt to equity ratio is .23, a very low number that is very positive, especially when the norm for the industry is about three times higher. While operating profits are more than adequate to service debt, their total cash and liquid assets also exceed their total long-term debt by more than 4x.
- Dividend: BBY pays an annual dividend of $1.80 per share, which translates to an annual yield of 2.43% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BBY is $12.13 per share. This number has declined in every quarter from a peak at around 15 at the beginning of 2017. At the stock’s current price, that translates to a Price/Book Ratio of 6.09. The industry average is higher, at a little over 12, but their historical average is only 2.9, which means the stock is trading twice as high as it has historically done from a valuation standpoint. At par with that historical average, the stock’s price would be only $35, which I think underscores the kind of risk investors who want to jump in now could be exposed to.
Here’s a look at the stock’s latest technical chart.
- Current Price Action: Over the last week or so, BBY rallied strongly off of support at around $69 per share. The stock’s all-time highs were reached a little below $80 just last month, followed by a rapid sell off that drove the stock down to its latest pivot low. It is showing strong momentum at the moment as it fills the gap that came when the stock dropped from a bit above $75 to below $71 on an overnight basis late last month. That momentum is likely to be tested between $75 and $76.
- Trends and Pivots: I’ve drawn two diagonal lines to illustrate the shift in the stock’s intermediate trend. The blue dotted line represents the trend up to the stock’s mid-May drop. Before that point, the trend provided good support that helped the stock rally to its January high and even establish a new all-time high price at nearly $80 per share; however the stock’s drop at the end of the month below that line, with new pivot low support at around $69, forced a redraw of that trend, illustrated by the dotted green line. The more gradual angle of that line implies a weakening of the intermediate trend, and a break below that support point would mark a major trend reversal that should see the stock drop to at least $62 before finding new support. The horizontal orange line at around $75 indicates where I think the stock is likely to find its next resistance point, and the red horizontal line is near the stock’s all-time highs. In order to extend the stock’s long-term trend further, it would need to break this level. For the time being, this is also where I believe the stock’s maximum foreseeable upside is. That puts the potential upside right now at $7, with downside at $11. That’s a reward: risk ratio of .63:1; smart traders and investors look for this ratio to be 2.5 or 3:1 at minimum.
- Near-term Keys: Watch the stock’s movement carefully. If the stock manages to push above $80, it would establish new all-time highs and force a complete reevaluation of the reward: risk profile I just outlined. On the other hand, a break below $69 – which I believe is more likely – would see the stock drop as low as $62 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.