From: Richard Kahn • aMMIMM

From: Richard Kahn • aMMIMM To: "jeffrey E." <[email protected]> Subject: Fwd: SELL Best Buy (BBY): Short cover rally reaching exhaustion: BAML Underperform S29 PO Date: Wed, 24 Aug 2016 20:50:05 +0000 Attachments: BBY.pdf Inline-I mages: image001png0ID I FE1C9B98D940.png; image002png0 I DIFE1D3639A830.png; image004png01 DI FE1F6D999CC0.png Richard Kahn HBRK Associates Inc. tel fa cel Begin forwarded message: From: "Ens, Amanda" < Subject: SELL Best Buy (BBY): Short cover rally reaching exhaustion: BAML Underperform $29 PO Date: August 24. 2016 at 4:42:03 PM EDT To: Richard Kahn Rich, Something a little different - I wanted to share this short idea from our Macro Equity & Global Alpha (MEGA) Short Analytics team. Would look to execute with buying put options. The Sept $38 put costs $0.60; the $39.50 strike cost $1.20. Global Equities MEGA — Short Analytics SELL BBY : Short cover rally in its later stages. (BAML UNDERPERFROM $29) • BBY experienced a significant short cover rally post earnings yesterday morning (+23%), however based on excessive volumes and resulting price action (chart 1), the shorts interest is now likely at or close to multi- year lows (chart 2). LONG buyers would need to step in materially to take the stock higher. Denise remains EFTA00820247 Underperform $29 PO. Sell BBY, stock borrow remains liquid. Those caught in the rally may look for limited loss strategies via options. • Despite a strong 2Q, we reiterate our Underperform rating. BBY has undoubtedly performed well in regard to execution, cost control, and market share gains. However, with the stock now trading at 12.0x 2017e earnings and 1.5x PEG, heightened expectations put increased onus on BBY to deliver in the 4Q which historically accounts for 55% of earnings. Compares do ease in the back half of the year, and from the perspective of product cycles, there is less pressure with the launch of the new iPhone in September, but 4Q is typically the period when competition from the likes of AMZN, WMT and TGT increases which could make it difficult for BBY to deliver on these heightened expectations and continue to take share. Earnings visibility remains low given weak industry trends which include weak PC sales, TV deflation and the possibility of a lackluster iPhone 7 release. Furthermore, with BBY already reaching $1.25bn of annualized cost savings out of a target of $1.4bn, we see limited room for additional cost takeout. • Our 12-month PO of $29 is based on roughly 9x our 2017 EPS estimate. We believe a 9x PIE multiple, which is below its 5-year average P/E, is fair, given that BBY is a mature over-stored retailer operating in a competitive industry and we see limited catalysts for comp and multiple expansion. Downside risks to our PO are continued structural headwinds, including deteriorating ASPs and lack of a product cycle, continued price competition from online and retail rivals and low visibility on BBY's restructuring initiatives. Upside risks to our PO are better-than-expected results from Renew Blue initiatives, margin and comp upside from store-in-store investments, increased productivity from inventory and supply chain investments and improved e-commerce and multi-channel capabilities. Best Buy: BBY executes a strong but expectations and industry trends keeps us at U P Chart 1: BBY 3 day intraday with volume Chart 2: BBY Short positioning John Egan Director, US Short Analytics Bank of America Merrill L nch Email: Direct This message, and any attachments, is for the intended recipient(s) only, may contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete this message. This message, and any attachments, is for the intended recipient(s) only, may contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete this message. EFTA00820248 EFTA00820249