Trading on the Trend

I recently purchased a wireless keyboard and mouse combination from the Best Buy Co., Inc. (NYSE/BBY) store around the corner from me. I thought it was a terrific deal. Regularly priced at $99.95, I purchased the combo package for $29.95. However, while I benefited, Best Buy was not as fortunate, as investors recently ran for the exits, dumping the stock on news of a shortfall in its 2006Q2.

 The leading U.S. electronics chain, up 49% over the last year, fell around eight percent on Tuesday, after reporting an earnings and revenue shortfall. Second quarter earnings of $0.37 per share was a penny short of Wall Street estimates, while Q2 revenues of $6.70 billion were also short of the $6.76-billion average estimate. The key same- store sales rose 3.5%, down from 4.3% last year.

 Nevertheless, while investors ran to the exits, this reaction may be premature. The Q2 shortfall was only the first time over the last four quarters that Best Buy missed Street estimates. The earnings trend has been positive, with three of four quarters beating Street estimates prior to the Q2. On a year-over-year basis, Q2 earnings were up 25% over the comparative quarter in 2004, in spite of the minor shortfall.

 The selling demonstrates the inherent nervousness that continues to plague the market. Investors are nervous and they will continue to dump stocks on any signs of negative news – warranted or not. The fact that Best Buy missed by a penny is not a big deal, unless it develops into a trend in the upcoming quarters; otherwise, it may be a buying opportunity to accumulate on weakness. I believe it sometimes makes more sense to buy stocks that are not in favor.

 Let’s go back to December 2000, when bearish sentiment dictated trading and the economy was in a downtrend. Investors were dumping Best Buy stock at $10.00 a share. On the other side, there were also the astute investors who realized that Best Buy was still the dominant player in the electronics area and who looked at the selling as a rare opportunity to acquire shares at a bargain price.

 We find ourselves in a similar situation with the current selling, albeit not at as an attractive a price. If the stock fails to find strong support, then you may want to enter and acquire some shares. The stock breached below the 20-day and 50-day moving averages at $47.68 and $48.94, respectively. These should be viewed as the upper targets, should the stock rebound. A key downside support price to monitor is the 100-day moving average at $43.58, which could be a good entry point on further weakness. The longer-term 200-day moving average is $39.96.

 My advice: do not always sell on one bad quarter; you need to trade on the trend.