by Lawrence Meyers | January 19, 2012 8:00 am
Anyone following retail stocks of any kind kept a careful watch on holiday sales. Those eyeing Best Buy (NYSE:BBY) were likely crushed at the awful sales and earnings report it recently delivered. Of course, any time a big-name stock sells off, the question that pops into my mind is, “Is it a value play or a short?”
To find the answer in this case, you have to look first at the macro retail picture, because therein lie clues to what’s going on with the company itself, and from there you can make your choice.
One word has proven to be a curse word for retailers, particularly those dealing in electronics like Best Buy. That word is “Internet.” There was a time when you had to walk into Best Buy or the now-defunct Circuit City if you were going to buy electronics. Then the Internet got invented. Then came Amazon (NASDAQ:AMZN). Then came zillions of other e-commerce players. The simple truth is that a bricks-and-mortar store will never be able to compete on price with an online retailer that executes with even moderate success.
I haven’t purchased a single electronic item in an actual store in more than seven years. I research candidates online, go to the store to examine the physical product, but then purchase the item online because even if the storefront price is the same as online, I’ll neither pay tax nor shipping. In most cases, the actual price will also be less than in the store.
Is it any wonder Circuit City is now dead? How long before Best Buy is in the trash heap? To be honest, I think its glory days are gone because the company simply doesn’t sell anything you can’t find cheaper online. So unless you’re stupid enough to purchase an item from Fat Karate Joe’s House of Electronics, rated 2 stars by 117 consumers, you’ll get the item you want, at the best price with a minimum of fuss.
Does that mean Best Buy is a short? Not exactly. In my mind, it’s selling horses and buggies in the era of the automobile. Its margins are down to 2.2% from 3.5% back in 2002, a creeping decay over many years. However, it sits on $800 million of net cash, and produces plenty of free cash flow.
You want to short companies that are not only operating an unsustainable business model, but that also have seriously deteriorating financials. Best Buy is not in that situation, and can plug along for quite some time like this.
That hardly means it’s a value play, though. You want to be investing in companies that are in “sunrise industries,” rather than industries that remind one of bankrupt companies like Circuit City. I suggest avoiding the stock, or selling if it you own it, but not shorting at this time.
Lawrence Meyers has no positions in any stocks mentioned.
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