Is Best Buy really a “sell?”
The past year has been a dramatic time for electronics retailer Best Buy (BBY). After nearly tripling its stock price, peaking at $45 a share in November 2013, the company’s stock plummeted almost 30 percent after releasing its fourth quarter earnings report. The store had weak sales during what should have been a strong holiday season and fell far short of its goals.
Over the past decade, Best Buy and similar retailers have faced difficulties competing with websites like Amazon.com (AMZN). The theory is that consumers use brick-and-mortar stores like showrooms. After finding the products they like, customers then take their business online.
This phenomenon has been blamed for the decline of companies like Borders and Circuit City. Many individual investors may be concerned that Best Buy is next on the list.
In a Seeking Alpha piece, a veteran trader who writes under the pseudonym “The Financial Lexicon” expressed the reasons why he thinks Best Buy will continue to be a viable investment for the foreseeable future. He first tackled the assumption that online retailers have a significant advantage over brick-and-mortar stores.
Consumers have been drawn to websites like Amazon because they can avoid paying sales tax. This is becoming less true as many states are requiring online stores to collect taxes. The Financial Lexicon also noted that Best Buy will price match many products from online stores. According to the author, as long as the retailer effectively markets the advantages of shopping in person, it should be able to bring in more customers.
In reference to the company’s stock price drop after the holiday earnings report, the author said that investor behavior was “completely unwarranted.”
“The disappointing holiday revenue results simply weren’t as bad as one might assume based on the stock’s performance,” The Financial Lexicon wrote. ”
The reaction in the stock shows the shareholder base is not one that has a ‘buy-and-hold’ mentality, and not one that makes Best Buy a suitable buy-and-hold candidate for investors with low-to-moderate risk profiles.”
According to the author, recent trading price action shows that Best Buy is attracting the wrong type of investor. Despite this, more experienced traders can still find success with Best Buy stock by engaging in short-term trades rather than exploring (short or long) buy-and-hold strategies.
At the moment, the future of Best Buy continues to look uncertain. While reaction to holiday sales may have been overblown, shareholders cannot overlook that overall 2013 sales from the store’s domestic and international segments declined significantly from the previous year.
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