Best Buy (BBY)
Best Buy (BBY) is a computer and electronics retailer that sells entertainment software, appliances, consumer electronics, and home office products. The company currently operates over 900 stores in the United States, and also has multiple locations in both Canada and China.
Best Buy shares are currently trading at $29.57, off considerably from their 52-week high of $49.65, but also much higher than their 52-week low $16.42. There are two crucial factors that influence Best Buy’s stock price, and these two factors are in a constant tug-of-war, pulling the stock price higher and lower.
The end of the rope that is pulling Best Buy’s share price lower is the increasingly weakening consumer demand caused by the ongoing global recession. Best Buy, which sells relatively expensive products such as televisions, computers, and other costly electronic devices has definitely felt the affects of the recession. Analysts are expecting same store sales for Best Buy to decrease by 5% in 2009, as consumers have less money to spend on discretionary items. Although the company has not yet released its 2008 4th quarter earnings report, it is expected to be very ugly.
The end of the rope that is pulling Best Buy’s share price higher is the fact that Best Buy is the best company in the U.S. consumer electronics retail industry, and it will use its strength in the industry to continue to expand and grow its business. The company plans on expanding to 1,200-1,400 stores in North America, which translates to a growth rate of about 100 new stores per year.
Not only is Best Buy growing, but its biggest competitors are shrinking. Circuit City, which was one of Best Buy’s competitors, declared for bankruptcy in November. Just last week, after months of trying to keep its operation from going under, Circuit City announced that it is planning on completely liquidating all of its 567 U.S. stores. Basically, there will be no more Circuit City (if you have a Circuit City gift card, I strongly suggest you go use it ASAP). While Circuit City’s bankruptcy may seem scary for Best Buy, as it shows how poorly electronic retailers are doing in today’s economy, it can also be seen as a great opportunity for Best Buy. Best Buy will surely increase its market share in the electronic retail industry, and I believe that it will buy many of the closing Circuit City stores and convert them to Best Buys. When the news was announced on Friday that Circuit City is liquidating its stores, shares of Best Buy jumped $2.20 (8.11%).
So, what is the smart play for investing in Best Buy? I believe the short-term for Best Buy will be rough. The company’s 4th quarter earning results are going to be abysmal, and the current macroeconomic conditions will continue to hinder the company’s sales. Investors have jumped on the Best Buy bandwagon prematurely due to the liquidation of Circuit City, and they have forgotten that Best Buy sells expensive discretionary items in a recession. In addition, Circuit City will be selling its products for very cheap during its liquidation sale, and this will also have a negative short-term effect on Best Buy’s sales. Having said this, I believe that once the recession is over and people begin looking to buy televisions and computers again, Best Buy has a ton of potential. It has increased its market share in the electronic retail industry, and it will continue to expand its business. So, give Best Buy some time. Be patient and let the share price fall as people start realizing that the company is being hurt by the recession, and then snatch it up in anticipation of many years of solid growth. $29 per share is way too high for me, but when it hits the low $20’s, it would be foolish to not invest in Best Buy.
Be patient,
Niki Pezeshki
College Trillionaire
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