DELAFIELD, Wis. (Stockpickr) -- When the market is struggling and selling off, one of my favorite strategies is to look for names that are bucking the downtrend and displaying relative strength.
During the recent market decline -- which for now has subsided -- one stock that continued to pop up on my chart scans was tech products retailer Best Buy (BBY). Best Buy has been a troubled stock so far in 2014, with shares collapsing from around $40 a share to its recent low of $22.01 a share. That more-than-30% decline is enough to make Best Buy shareholders want to rush for the exits.
Best Buy's problems are widely known on the Street. At the start of 2014, the company reported that U.S. same-store sales dropped 0.9% and overall revenue trended lower by 2.6% during the all-important holiday season. Best Buy blamed its sales problems on supply constraints for popular products, a drop in customer traffic and a weak mobile phone environment. Despite all of those issues, many on the Street believe that Best Buy is an attractive turnaround story as it starts to shift its business model more toward the online customer.
Make no mistake about it -- Best Buy has been forced into changing its business model in order to survive since Amazon.com and other online retailers are stepping up their Internet selling game. One major thing Best Buy is implementing to make its online experience better is its ship-from-store initiative, which it has now kicked off in over 1,400 stores. The goal of this plan is to accelerate online growth, improve online conversion and juice store comps. No customer wants to order something online and have to wait forever to get it, so let's give Best Buy some credit for taking these steps.
Another major business focus for Best Buy is its Geek Squad service. Anyone who has ever had a technical issue with a computer or other electronic device knows exactly how valuable tech support is. I recently had a TV I bought from Best Buy, along with a sound system, mounted on my wall and calibrated by Geek Squad, and the service was excellent, reasonably priced and timely. Best Buy should be marketing Geek Squad more aggressively and getting more out of this underutilized asset.
Best Buy is a sitting in the driver's seat to capitalize on a sea change in how consumers use big-box retailers. Consumers aren't likely to buy a big-ticket item such as a TV online until they've seen it in person. That said, they might go to Best Buy to view the TV then shop online to find the cheapest price. This is where Best Buy needs to streamline its online operations and cost structure so it can compete on price and still provide consumers a great customer experience when demoing an electronic product. I think this means fewer, more strategically located stores with a staff that is knowledgable about how the modern customer shops.
What has really started to perk my interest in shares of Best Buy of late is how the stock did not go down much during the recent market selloff. From a technical standpoint, this stock has been uptrending since its major gap down, with shares moving higher from a low of $22.01 to a recent high of $28.02 a share. During that uptrend, shares of BBY have been making mostly higher lows and higher highs, which is bullish technical price action. Shares of BBY have recently crossed back above its 50-day moving average of $25.17 a share and are now starting to trend within range of triggering a major breakout trade.
Traders should look for long-biased trades in BBY if it manages to break out above some near-term overhead resistance levels at $27.20 to $28.02 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 10.97 million shares. If that breakout materializes soon, then BBY will set up to re-fill some of its previous gap-down-day zone from January that started near $38 a share. Some possible upside targets if BBY gets into that gap with volume are $35 to even $40 a share.
Market players can look for long-biased trades in BBY off weakness as long as its trending above its 50-day moving average of $25.17 a share or above more key near-term support levels at $25.13 to $24.54 a share. One could also look to buy BBY off strength once it clears those breakout levels with volume and then simply use a stop that's a comfortable percentage point from your entry.
One final reason that I love the opportunity that's currently being presented in shares of BBY is the large short interest in the stock. The current short interest as a percentage of the float for BBY is very high at 11.2%. The bears have also been increasing their bets from the last reporting period by 4.1%, or by about 1.23 million shares. If shares of BBY break out into that gap soon with volume, then I expect to see a large short-squeeze develop for this stock. Short-sellers do not like to be short a stock that has started to move into a massive gap like the one we have on BBY's chart right now.
The bottom line: We have a potential turnaround story here with Best Buy as it begins to shift its business model to a more online-friendly one. That combined with a high short interest and a bullish technical chart setup could lead to massive profits for traders who are quick enough to pull the trigger.
Put shares of BBY on your trading radar. A monster trade could be right around the corner.
-- Written by Roberto Pedone in Delafield, Wis.