Best Buy Appears Ready to Live Up to Its Name

Best Buy shares have been pummeled by the market yet the firm seems likely to post its second best EPS in history. Its somewhat volatile stock has a high financial strength rating plus 90th percentile readings in both price growth persistence and earnings predictability. After dropping greater than 50%, from almost $142 last November to south of $67, the shares now appear way too underpriced. At their most recent five best entry points (green-starred below), the shares bottomed at from 6.1-times earnings (during the Covid-panic) to 9.4-times earnings. Each of those five starting points led to very substantial gains within months, not years. BBY's four should have sold moments (red-starred) saw the stock at higher than typical multiples and lower than normalized yields. Over the past decade BBY typical fetched around 12.6-times forward EPS, while paying about 2.55% in current yield. As of Wednesday, those metrics were 7.8-times EPS, accompanied by the highest yield to date, at 5.28%. Assuming a slightly below normal 12 multiple on the already reduced estimate for fiscal 2022 (ends Jan. 28, 2023) suggests an eight-month target price north of $103. That goal is far from an upper limit. Reverse engineering the current dividend rate would project a target of $138 or so. Note that BBY fetched top ticks of $124.90 in 2020 on final EPS of $7.91 and changed hands near $142 last fall as EPS were destined to close at $10.01. Value Line loves Best Buy's three to five year prospects. It sees BBY trading between $130 and $200, not later than 2027. The founder and former CEO, of BBY made an almost $20 million vote of confidence on BBY's future stock price action on May 25, 2022. His average cost was $72.60, well higher than today's quote. Horrible overall market action now let's us play BBY at a 16.2% discount to what Mr. Schultz paid just weeks ago. Yahoo Finance expects BBY to hit $89.24 by this time next summer. I find that goal a bit conservative as it assumes the shares will fetch only 6.8-times its own fiscal 2023 estimate of $9.85. Even so, a 39% total return would probably still please most investors. Independent research house Morningstar lists BBY as a 5-star Buy. The firm deigns to provide year-ahead target prices but lets us know its view that BBY is worth $126 or so right now. GuruFocus pretty much seconds that opinion. It calls present-day fair value as $114.33 and sees $117.71 as a reasonable goal by Jan. 31, 2023. Quantitative-based FastGraphs joins the club which believes BBY is far too cheap. It projects $118.61 by next January and sees BBY reaching $138.22 again by early in 2024. Option sellers can probably benefit via short sales of LEAP puts on BBY out to Jan. 19, 2024. Actual pricing on its $65 - $80 strike prices, with BBY at $66.72, are shown below. Premiums look generous due to today's extreme market uncertainty. That great news for option sellers. With about 20-months left until expiration day there's plenty of time for things to get back to normal. Margins of safety appear excellent at from 8.9% on the most aggressive $80 strike to as high as 22.3% on the $65 strike price puts (vs. the already cheap trade inception price). Future stock market action can never be guaranteed. That said, the two-year chart next shows that owning BBY at even the highest of the if exercised prices in my examples would have been a winning position 100% of the time dating back more than two full years. That is about as good as it gets on risk/reward for a high-quality, very profitable company like Best Buy. BBY spent most of those past 24-months hovering between $90 and $120. Buy some BBY shares, sell some LEAP puts as described or consider doing both.

Best Buy Appears Ready to Live Up to Its Name

Let's check out why this retailer is way too underpriced -- and how to play it.

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