I love a good underdog stock. When the crowd thinks a
company's fortunes are in decline, I like to take a closer look
to see if there's solid evidence to support their point of view.
Often there's not.
As a contrarian, I've repeatedly made outsized profits trading
what others shy away from. But rather than the "Dogs of the Dow,"
I prefer the underdogs of the S&P 500. (My colleague
Christian Hudspeth laid out a similar strategy last month.)
In particular, I'm excited about the prospects for the world's
largest multinational consumer electronics retailer,
Best Buy (NYSE:
The bears will argue the company's glory days are over. (In
fact, my colleague Marc Bastow recently argued just that.)
Consumer electronic sales are slumping, with researcher NPD
projecting they will drop 2.6% in the second quarter.
More important, the bears will tell you, consumers are more
apt to purchase their electronics online than in brick-and-mortar
stores. With e-retailers like Amazon.com (Nasdaq:
) operating on thinner margins, they can offer lower prices.
BBY has seen the trend toward online buying and is fighting
back. Online revenue is growing quickly, jumping 29% year over
year in the first quarter.
The company recently improved its website by adding a more
accurate search function. The site now offers recommendations
based on purchases and gives more detailed product and pricing
In addition to its eight distribution centers, Best Buy has
initiated ship-from-store at its 1,400 locations to help fulfill
orders faster and cut down on shipping time. With the option to
purchase online and pick up in store and a "low price guarantee,"
Best Buy is becoming stiffer competition.
In addition to its increased online focus, Best Buy has
introduced rigorous cost-cutting measures. Its "Renew Blue"
program is a turnaround strategy aimed at enhancing supply-chain
efficiency, improving customer experience, optimizing store space
and minimizing the cost of returned merchandise. So far, Renew
Blue has allowed Best Buy to slash $860 million in costs.
Management hopes to achieve $1 billion in cost savings per
As you can see in the chart, BBY is on the verge of bullishly
breaking the major downtrend line after a long basing period.
This would be an excellent technical entry point, as traders
would be buying close to important support at a time when the
stock is likely to change direction and move quickly higher.
BBY bottomed around $11 in December 2012. By November 2013, it
had more than quadrupled in price, hitting a peak of $44.66.
Not surprisingly, the shares experienced profit-taking. A
major downtrend line formed as the stock surrendered much of its
gains. At the beginning of 2014, shares plummeted 29% in one day
when the company reported disappointing holiday sales.
Shortly thereafter, the stock found support around $23, and
has since consolidated in a narrow range between $23 support and
resistance near $28.
This week, shares poked above $28 resistance and are in a
minor uptrend. BBY appears headed toward a key test represented
by the intersection of the major downtrend line just above
If the downtrend line is broken, the next major resistance
level would be near $37.50, which was an area of support during
the late 2013 topping period. This target is roughly 30% above
To minimize downside risk, I suggest waiting for the stock to
break out above $29.11 before purchasing shares, which can be
done using a using a buy-stop order.
Turning to the fundamentals, sales in the second quarter and
full-year fiscal 2015 are expected to slip 3% and 2%,
respectively. While revenue is projected to drop marginally,
earnings should rise due in part to cost cutting. Second-quarter
earnings are expected to be flat at $0.32 per share, but
full-year earnings are estimated to rise 10% from a year ago, to
That means the stock is selling at a very reasonable forward
price-to-earnings (P/E) multiple of 12.5, well below that of the
Risks to Consider:
Amazon is a formidable competitor and could launch a
counterattack to protect market share at any time. However, BBY
seems to have turned an important corner with its cost-cutting
measures and use of stores as distribution centers. A breakout of
the downtrend line should signal traders believe this strategy is
Action to Take -->
-- Place a buy-stop order on BBY at $29.11
-- Set stop-loss at $23.85, just below current support
-- Set initial price target at $37.45 for a potential 29% gain by
This article was originally published at
This Underdog is Less Than $1 Away From a
Breakout 'Buy' Signal
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