shorting Best Buy, BBY

We enter Best Buy, ticker BBY, short.

We believe it's a good time for a hedge on the short side, and that Best Buy is a very compelling candidate. We've been watching this stock and following the company and sector for some time now. Here's our thinking on the situation.

Chartists will note obvious long-term downtrends in place, and the 200-day moving average has clearly been an important line of support and resistance. It's currently circa $27.30

We suggest shorting Best Buy, BBY, at current levels or higher. It closed today at $25.02 We suggest covering the position for an effective loss of approximately 14% on closes above $28.50 which is slightly above a level of key resistance in our view. That's the level which proved supportive in April and June of 2011, where the stock broke down from in late July of last year, and where the highs were put in during November and December.

Shorts must factor that Best Buy pays a dividend, which of course short sellers are on the hook for should we hold it through a dividend declaration. On average, that's $0.14 share quarterly. Next dividend declaration should be circa mid-late March. BBY's next earnings announcement is scheduled for March 26th.

The other other obvious technical points of note include the long-term downtrend in RSI (Relative Strength Indicator) peaks, and we find that the RSI has very recently peaked and apparently turned down from that downtrend.

In the MACD (Moving Average Convergence & Divergence) we see that the current levels correspond to long-term peaks and a possible downturn beginning in that indicator too.

The business itself, as well as the overall sector is weak. In general people have spent and borrowed far more than they can afford, and have all the electronic gadgets and large televisions they "need". For several quarters now, Best Buy has been disappointing vs. analyst estimates. We expect that to continue.

On a relative basis, BBY is extremely weak. Since early July it is down 22% while the DJIA is slightly higher and gold is about 15% higher over the same period. Since January of 2008 the DJIA is essentially flat, gold is up 96% and Best Buy is down 46% We believe this relative failure will continue going forward.

Lastly, general equities markets are up signficantly since early October and there is material overhead resistance. By contrast, Best Buy is relatively flat since then, and if & when markets falter we think BBY will drop at least to its December lows cirica $23 and over time we'd frankly not be at all surprised to see the stock below $10.







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