by Chris Georgopoulos, SmartStops contributor
Reading financial articles can be, let’s say boring at times. This article we are going to try to spice it up, let’s play a game of role playing. Famed speculator, Jesse Livermore once was quoted…
“If I were walking down a railroad track and saw an express train coming at me at 60 miles an hours. I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track, if I desired.” –Reminiscences of a Stock Operator, Edwin Lefevre.
For this game let’s rename the train, Best Buy stock (BBY: NYSE), the ““I” in walking down the track” we can call the shareholders of Best Buy and the speed of the train, the issues. The game is scored by the costs of each decision. Whoever has the best return wins!
It is the end of summer 2005, Best Buy is approaching $80/share and the future couldn’t be brighter. The tech bubble burst is ancient history, the housing market is hot, interest rates are low and every house in America is an ATM for consumer spending. You are on the railroad track…there isn’t a train in sight!
It is now the beginning of fall 2008; Best Buy has fallen to the mid $40s in defiance of the market making new highs and there are rumors of problems in Mortgage backed securities. (Note: Sidestepping risk is now made possible with the release of SmartStops.net which if had been available would have had you out in the $70 range in 2005). Your friend has made a fortune flipping speculative properties in south Florida and Las Vegas, but you see he is worried. He still has five houses on the market with almost no personal income… (You know how this story ends) You can hear a train coming and it sounds like it’s really moving!
Only a few months later, Best Buy is trading under $18/share! The rumors are true; the housing market has crushed the stock market. It seems nobody thought housing prices would ever go down and the economy is on the verge of total failure. You can now see the train, its moving fast and finally you start to consider if you should actually get off the tracks.
(SmartStops.net issued two Long-Term exit signals in 2008 the first January 4, 2008 at $46.80 and on September 16, 2008 at $40.68. That’s a $22 per share savings by sidestepping risk.)
It is two years later; Best Buy is trading back in the mid $40s. The US Government stepped in and back-stopped the entire financial system, confidence has been temporarily restored. The train has slowed to almost a complete stop; you are relieved and continue your stroll.
(SmartStops.net issued two Short-Term reentry triggers starting on December 17, 2008 at $28.88 and on March 17, 2009 at $30.89. Stock protection of $15/share.)
Its September 13th 2011, Best Buy has once again been cut in half and is trading around $23/share. They have just announced another disappointing earnings release. Best Buy unlike its failed competitor Circuit city, is still profitable and is forecasted to grow, (Yahoo finance has 5 year growth estimates just over 9%) but their business model has been questioned. Online rivals such as Amazon.com (AMZN: NASDAQ), Overstock.com (OSTK: NASDAQ) andEBAY.com (EBAY: NASDAQ) have taken away market share and lowered margins. These questions are shown in the technical breakdown of the stock which has been in a downtrend since April of 2010 and is now approaching new 52 week lows. The train has started moving again, at top speed! It’s so close you know what color the eyes of the engineer are!
SmartStops.net has issued multiple risk triggers in the past year, with the first one on December 14 2010 at $40.19 thus offering protection of $16 per share if the first one was acted upon.
Getting off the track and waiting for the train to pass is the clear winner. Although the returns are not exact and do not take into account commissions, executions or any other pertinent details the point has been made. There is no reason to walk into an oncoming train, when all you have to do is step off.
There is only one question that’s remains, “Can Best Buy stop the train?”
To give credit where credit is deserved, Best Buy is the largest electronic retailer in the US and they have jumped hurdles that tripped up some of their competitors. They are still making money and are forecasted to continue. Their growth outside the country, mainly in China through their Five Star stores is impressive and their willingness to adapt to online competitors has been shown through the announcement of their new third party online marketplace. Time will tell if it’s enough but I think there is a better option.
Instead of trying to directly compete with online retailers, partner with them! Take advantage of your own business model by offering your advantages to your competition and use their advantage to yours! Trying to offer a price advantage with a brick and mortar model to an online model is a losing battle, and vice versa. Service is the key advantage to brick and mortar and price is the key advantage to online. People want both but since the costs of brick and mortar will always hamper the ability to compete with price and the online model does not have the infrastructure to compete on service, a partnership is logical.
For example, if a partnership between Best Buy and Amazon took place, every electronic sold online could offer the services of Best Buy’s Geek Squad. The consumer would get the price they want and the services to knowledgeably install, repair and accessorize. Best Buy would pay Amazon a commission for each service sold and would receive revenue from a consumer that they would have lost anyway.
The sum of this strategic move would eliminate “Best Buy as Amazon’s Showroom”. Best Buy could concentrate on selling the high margin services to customers that choose to shop online. Amazon will now have the pricey infrastructure of Geek Squad to help increase margins on electronics they sell. Best of all the consumers get both, service and price!
As the saying goes, “If you can’t beat them, Join them!”
The increased competition from online retailers has put a serious question on the viability of best Buy’s business model but often overlooks the incredible opportunity it offers. Best Buy not only has the ability to stop this train but reverse it.