11:00pm (EST)

1. Market Summary

2. Is Best Buy a Bargain?

3. Chesapeake Energy Looks Cheap

4. Week Ahead

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1. Market Summary

There was a lot of action in the market last week between the bulls and bears as volatility picked up.  The bulls won the first half of the week while the bears claimed the back half with Friday ending mixed.  The week was a tossup as well, but the market had a massive July.

The bulls pushed resistance levels earlier in the week after a month of solid gains but the bears held ground and are pushing back.  There were a number of stocks and sectors on the move and next week will be much of the same with earnings and another update on unemployment.

The Dow had dropped to a low of 10,347 on Friday but battled back to trade into positive territory before ending the session a point lower at 10,465.  The high for the week was 10,632 which is the top of the 10,600-10,800 range that is current overhead resistance. Support remains 10,200-10,000.  For the month of July, the Dow added 690 points, or 7.1%.      

The S&P 500 finished the day fractionally higher to close 1,101.  The index dipped below the 1,100 level on several occasions but ended the week flat like Friday.  The high was 1,120 which was just below resistance at 1,125 while the low was 1,088.  Support levels are 1,070 and then 1,050.  For the month, the S&P 500 surged 70 points higher, or 6.9%.

The Nasdaq also ended the day with a slight gain of 3 points to settle at 2,254.  Tech was especially volatile as it traded to a low of 2,218 while the high was 2,307.  We said in our last Weekly Wrap the cap appears to be 2,300-2,350 to the upside while 2,150 will provide the first line of support for the index.  The Nasdaq popped 145 points to the good, or 6.9%, for the month of July as well.

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2. Is Best Buy a Bargain?

Last week we took a quick look at Best Buy (BBY, $34.66, up $0.11) as shares continue to drift towards their 52-week low of $32.81.  The stock was setting 52-week highs back in late April and reached $48.83 before the recent 30% haircut.  The all-time high is $58.55 which was set in May, 2006.

The stock got whacked after reporting earnings in mid-June and missing Wall Street’s earnings expectations by 14 cents.  Shares fell 6% that day as the company blamed the shortfall on new store openings, higher investments to raise store sales and the euro.  Despite the miss, Best Buy said it was still on track to hit its 2010 outlook at the time.

Best Buy is the largest specialty consumer electronics retailer in the US and has a strong international presence. They dominate this segment thanks to the demise of their major competitor, Circuit City, but others are moving in on their turf and want some of the action.  Wal-Mart Stores (WMT, $51.19, up $0.13) has emerged as their top low-cost competitor and HHGregg (HGG, $20.29, up $0.18), with its 130 stores and $1.5 billion in sales, also wants a piece of the pie.

Best Buy has nearly 1,200 stores and wants to get bigger.  Although they have done a few deals in the past, we doubt they make a run at made Radio Shack (RSH, $21.54, up $0.74) which has nearly 4,500 locations.  There water cooler talk is that Best Buy wants to turn the “Shacks” into mini Best Buys but Radio plans to hook-up with Target (TGT, $51.32, down $0.19) as the wireless/ mobile business continues to grow at a rapid pace.

Best Buy has focused on acquisitions outside the US in the past (Radio Shack has little international exposure) or acquisitions that has added to their product line (Geek Squad and Musicland) so we won’t rule anything out.  However, the company is a little cautious after the Musicland acquisition which was a total disaster.  Best Buy basically gave this division two years after they bought it.  

The original purchase of Musicland was done with the intention of adding electronics to the format and adding mall based stores in smaller markets to expand their reach, but, it just didn’t work.  These are the same arguments that are being made for the Radio Shack acquisition now and one of the reasons why we view it as unlikely.  The management team is smarter and unlikely to make the same mistake twice.

Shares of Best Buy typically do well in the time frame leading up to a holiday season and will worth watching going forward as we get back-to-school sales and Christmas.  One catalyst that could pay dividends for Best Buy is their attempt to get into the used video game market sometime in November. Half of GameStop’s (GME, $20.05, up $0.31) revenues come from used video games, and with margins of 50+%, this is a highly lucrative business.  Now that we think of it, maybe GameStop could be in play down the road.

Best Buy will announce earnings in mid-September so these sales figures (and) plans won’t hit for another 3-6 months.   We wouldn’t be surprised to see the stock rally off the lows if the market heads higher and there were a slew of downgrades after they missed expectations last time out.  Meaning, expectations will be low going in.

Currently there are 2 “Strong Buy” (recommendations), 5 “Buy”, 8 “Hold”, 1 “Underperform” and 1 “Sell” rating on the stock.  Analysts will be tripping over each other if Best Buy is able to report a blowout quarter.  The stock is trading at 11x forward earnings and Best Buy is buying back its own paper as last quarter showed a repurchase of 2.5 million shares.

We currently have Best Buy on our Watch List and we are looking at some longer-term options as way to play a rebound.  We are also going to list some shorter-term options in case shares start to run higher but there was some serious technical damage done on the way back down to current levels.

Either way, Best Buy looks cheap at these levels and if we were stock buyers we would start half positions here under $35.  As far as option, if we do decide to recommend a trade, our current subscribers will be the first to know in our Members Area.

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3. Chesapeake Energy Looks Cheap

Chesapeake Energy (CHK, $21.03, down $0.07) is another stock trading near its 52-week low which is currently $19.62.  The gulf oil spill has highlighted the environmentally friendly aspect of natural gas drilling as most of it is done on land and you can’t “spill” it.  However, this hasn’t helped the stock as it, too, is down 30% from its 1-year high.  

The company is a major producer of natural gas in the US with over $10 billion in revenues. They own interests in over 44,000 natural gas and oil wells (90% natural gas) that produce 2.4 billion cubic feet equivalent (bcfe) of natural gas daily in such regions as the Texas Panhandle, Marcellus Shale, Barnett Shale, and Permian Basin.

Looking broadly at the space, there is a surplus at the moment compared to the 5-year average as the increased extraction from the shale plays have contributed to the large amounts of surplus. This has kept natural gas prices in a tight range and seems to imply near term price stability going forward.  The good news is that the US could be a net exporter of natural gas if production continues to climb and the switch from oil to gas ever happens.

Aubrey McClendon, their long time CEO, has been highly acquisitive, having snapped up tens of thousands of acres and proven reserves in the past 10 years.  These acquisitions have been funded through notes (mostly convertibles), preferred stock offerings, and common stock offerings which have impacted the share price in the past and have raised some eyebrows.

Chesapeake has done several joint ventures with a variety of major and minor players throughout the years, as well.  In addition, the company has also been mentioned as a takeover target, particularly after Exxon Mobil (XOM, $59.68, down $0.66) bought XTO Energy for $30 billion.

So, are shares cheap?

Three outside factors bear watching with the entire natural gas space.  Specifically, cap and trade, the government energy plan and the recent gulf oil spill.

Cap and trade is a proposed system of regulating carbon emissions that is already being used in Europe. Legislation to implement such a system in the US would be good for natural gas stocks as it is one of the cleanest fossil fuels, but, it does not appear to be going anywhere at this point.

The government’s long term energy plan has largely ignored natural gas as an alternative to oil, although T. Boone Pickens and the industry continue to lobby for broader adoption as a central component.

There is still more research that we would need to do before we would say Chesapeake is a “Solid Buy” at these levels.  However, shares do tend to trade in the $20-$26 range on a consistent basis and right now they are at the bottom. So, on a technical level, they look good.

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4. Week Ahead

Earnings will once again dominate the week as over 100 S&P 500 companies are set to report along with 3 Dow components.  Roughly 330 of the 500 firms that make up the S&P have announced with 75% exceeding expectations, 10% coming in on cue while 15% have disappointed Wall Street.

Companies continue to improve their balance sheets but it doesn’t mean they are hiring. 

The market will get another update on unemployment when Friday’s payroll number hits the fan.  The July jobs report is expected to show 100,000 jobs were added but it won’t likely change the 9.5% unemployment rate.

Another big economic report to watch for is Monday’s ISM number.  The Institute of Supply Management is expected to show a print of 55.0% versus 56.2% in June.  If the market gets a worse-than-expected report then the bears could growl.   If it comes in better then look for the bulls to push current resistance levels again.

We will be back in the morning with the companies reporting earnings and a fresh update on where the market will be headed at the open.

Side note:  We mentioned Friday we have hard copies of our trading manual, How to Trade Options on Momentum Stocks and our Watch List Report .  Both should be available soon.  We are going to make this a special deal since it coincides with our 1-year anniversary so look for a new section on the website coming in the next two weeks with all the details.