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Are You Short Best Buy? If Not, Get Started

BBY is toast -- it's just a matter of when

   

After reading the headline, you might be asking yourself, “What? Wasn’t the time to short Best Buy stock months ago?”

Yes — unless you happen to be very careful with your shorts.

I don’t like to short on speculation. I only short stocks that are insanely overvalued, like when Netflix (NASDAQ:NFLX) was at $300, or when I see a stock that will ultimately end up in bankruptcy. I wrote earlier this year that, at the time, Best Buy (NYSE:BBY) was sitting on $800 million in cash and had ample free cash flow, and thus was in too strong a position for investors to go short.

Now, there’s a short case to be made with Best Buy stock at $15, because I’ll take 15 points on a short any day.

Best Buy pre-announced awful Q3 earnings. Here are some of the highlights:

  • The company is going to see a same-store sales decline of 3.25 to 5.3%.
  • Revenue will be impacted by as much as 6% to 8%.
  • Gross profit will be hit anywhere between 7% and 10%.
  • SG&A expense will go up 2% to 4%.

Analyst also have adjusted earnings downward to as low as 8 cents from last year’s 47 cents.

As I wrote earlier, Best Buy is obsolete. It is in the commodity business, and those commodities are available at lower prices online, at places like Amazon (NASDAQ:AMZN) or eBay (NASDAQ:EBAY) or Walmart (NYSE:WMT) or countless other online retailers. Online margins are extremely thin thanks to intense competition, so imagine how Best Buy must be burning through cash, considering it must compete while operating large stores.

In the meantime, Best Buy’s expenses are increasing, and the company is paying a dividend while burning through cash.

As of Aug. 3, Best Buy had $771 million in cash and long-term investments. That was a decline of $740 million from the prior quarter, of which $513 million was used to reduce long-term debt and $104 million was used to pay a dividend. In the meantime, the quarter saw negative free cash flow of $776 million. BBY simply cannot sustain that kind of negative cash flow much longer.

The good news is that the fourth quarter is when Best Buy really shines. The problem is I don’t expect much out of it, for all the reasons stated, and the fact that all these new initiatives (such as mobile stores) aren’t going to work.

Some investors might be holding out for the promised buyout from the company’s ousted chairman and founder, Richard Schulze. This is the only true risk to a short right now.

Heck, Best Buy does more than $50 billion in sales, just like Amazon. The problem is after backing out cost of sales ($38 billion) … and SG&A ($10 billion) … and interest and income taxes … there just isn’t much left over.

However, even though I see Best Buy as a company headed for bankruptcy — just like Circuit City (which had the same model) — that doesn’t mean there aren’t enough stupid private equity firms to pony up some capital because they mistakenly see a distressed asset. Perhaps that’s the reason the company paid down so much debt — it is trying to shine up the balance sheet for a prospective sucker… er, I mean buyer.

Overall, the path of least resistance to the stock is down, and — barring a miracle buyout — bankruptcy seems certain. Short BBY.

Lawrence Meyers does not have a position in any security, but might enter a short position on BBY in the next 72 hours. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


Article printed from InvestorPlace Media, http://investorplace.com/2012/11/are-you-short-best-buy-if-not-get-started/.

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