Best Buy (BBY) Near All-Time High Ahead of Report

Best Buy Co., Inc. (BBY) reports third quarter 2020 earnings in Tuesday's pre-market, with analysts looking for a profit of $1.72 per share on $10.97 billion in revenue. If the company meets these expectations, earnings per share (EPS) will mark an impressive 52% profit increase compared to the same quarter in 2019. The stock fell more than 4% in August despite beating second quarter top- and bottom-line estimates but posted an all-time high above $124 earlier this month.

Key Takeaways

  • Best Buy stock is trading close to an all-time high ahead of Tuesday's third quarter earnings report.
  • Risk is elevated because market players have been dumping shares of COVID beneficiaries.
  • The stock can sell off to $108 and still retain bullish technical characteristics.

The retailer has benefited from the COVID-19 pandemic, with socially distanced customers loading up on computing devices, tablets, and appliances. The online sale portal has blossomed as well, with domestic comparable online sales surging 242% in the second quarter. However, risk has increased heading into this week's confessional because the flood of positive vaccine news has triggered a modest exodus out of pandemic beneficiaries.

Black Friday sales will focus media attention on major retailers, but the surging pandemic places fresh pressure on physical operations, with new lockdowns, capacity restrictions, and ICU beds running out in several states. A skeptical public has ignored CDC warnings about the Thanksgiving holiday, but the impact of the virus on retail sales is likely to grow exponentially between now and New Year's Day 2021.

Wall Street consensus on Best Buy stock has deteriorated in recent months due to outsized share price gains, with a "Moderate Buy" rating based upon 10 "Buy," 10 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $97 to a Street-high $138, while the stock is set to open Monday's session about $2 below the $122 median target. There's upside potential with this mid-range placement, but it isn't wise to expect a big trend advance any time soon.

Black Friday refers to the day after the U.S. Thanksgiving holiday, which has also traditionally been a holiday itself for many employees. It is typically a day full of special shopping deals and heavy discounts and is considered as the kickoff of the holiday shopping season. 

Best Buy Weekly Chart (2012 – 2020)

Best Buy stock fell to a 10-year low in the lower teens in 2012 and turned higher, stalling in the mid-$40s in 2013. It broke out of a multi-year triangle pattern after the 2016 presidential election and completed a round trip into the 2006 high near $60 in 2017, ahead of a breakout that stalled near $80 in the third quarter of 2018. A selloff to $50 rounded out a trading range that held intact into a December 2019 breakout that failed in February 2020.

The subsequent decline found support at the 2018 low in March, giving way to a vertical recovery wave that reached first quarter resistance in August. It broke out immediately, posting a new high above $123 in October. The stock failed an early November breakout attempt, pulled back to the 50-day exponential moving average (EMA) for the third time since September on Nov. 9, and has ticked higher in a lazy bid since that time.

The weekly stochastic oscillator has entered a sell cycle, but the monthly buy cycle remains intact, predicting two-sided action rather than a trend in either direction. Price action since August has held within the boundaries of a rising wedge pattern, with support at $113 and resistance at $127. A break at either end would alter the technical outlook, but wedges often morph into parallel channels (black lines), so a decline could stretch into $108 and not set off strong sell signals.

wedge is a price pattern marked by converging trendlines on a price chart. The two trendlines are drawn to connect the respective highs and lows of a price series over the course of 10 to 50 periods. The lines show that the highs and the lows are either rising or falling at differing rates, giving the appearance of a wedge as the lines approach a convergence.

The Bottom Line

Best Buy heads into Tuesday's earnings report with other COVID beneficiaries engaged in corrections, raising the odds for a sell-the-news reaction.

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

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