Best Buy Uptrend May be Coming to an End

Best Buy Inc. (BBY) reports Q4 2020 earnings on Feb. 25, with analysts looking for a profit of $2.94 per-share on $15.3 billion in revenue. If met, earnings-per-share (EPS) will mark a minor profit increase compared to the same quarter last year. The stock sold off 7% in November despite beating Q3 top and bottom line estimates on 22.6% growth in U.S. comparative sales, with shareholders hitting the exits after the retailer lowered Q4 expectations.

Q4 Warning

The warning ahead of the 2020 holiday season might have been misplaced, with the National Retail Federation reporting that holiday sales grew by a better-than-expected 8.3%. Bearish action broke range support just four days after the report, dropping the stock into a pattern that could signal a long-term top. However, bullish commentary is increasing ahead of earnings, offering an opportunity for price action to shake off technical damage.

BofA Securities analyst Curtis Nagle upgraded Best Buy to ‘Buy’ on Thursday, noting “We have long seen BBY as one of the highest quality names in our coverage and we are taking a more positive view given: 1) our belief that BBY should come out of the COVID-19 period in a stronger and more profitable position, 2) there is room for a continuation of steady growth in multiple segments and compares for the next several quarters are easy, and 3) valuation is attractive with shares trading at 14x 2021E EPS”.

Wall Street and Technical Outlook

Wall Street consensus now stands at an ‘Overweight’ rating based upon 12 ‘Buy’, 14 ‘Hold’, and 1 ‘Underweight’ recommendation. One analyst recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $74 to a Street-high $150 while the stock opened Thursday’s U.S. session about $13 below the median $125 target.  Best Buy could gain ground into earnings, given this humble placement.

The stock completed a breakout above 2018 resistance in the mid-80s in July 2020 and took off in a strong trend advance that posted an all-time high at 124.89 in November. The subsequent decline sliced through the September swing low at 102.83 and fell to the 200-day moving average before bouncing at the start of 2021. This pattern is dangerously close to completing the right shoulder of a head and shoulders top that could signal the end of the primary uptrend.

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