Best Buy (BBY) stock is now hovering right around 52-week lows having crashed more than 20% during the last three months.
With the markets in turmoil to start 2016, and BBY stock 53% more volatile than the market, it might seem wise to avoid Best Buy stock for now.
Yet, to start 2016 several research firms have upgraded the stock, thereby seeing clear value in BBY stock. In retrospect, it might be wise for investors to see this value.
Analysts Get Bullish on BBY Stock
When the markets start going south, it is not atypical for stock downgrades to pour in. However, that has not been the case with BBY stock.
Instead, Deutsche Bank, Argus, BofA and Vetr have all either upgraded the stock or reiterated their bullish outlook in the early days of 2016. These outlooks have come as a result of channel checks from the holidays, along with a mixture of valuation analysis.
Argus specifically noted MasterCard‘s (MA) read on holiday spending that implied better-than-expected spending. Furthermore, big box consumer electronics retailers were expected to be winners of the holidays.
Nevertheless, Best Buy stock is now trading at just $29 per share. However, the one-year average price target among the 18 analysts who cover BBY stock is $38.39. That represents upside of 32%.
Keep in mind, there aren’t too many companies of Best Buy’s size that analysts are projecting stock upside of 32%, not after a six-year 70% gain in the S&P 500. Hence, equity markets and stocks are mostly stretched in valuation.
BBY Is Cheap and Performing Well
That said, the reason that analysts are expecting so much upside in BBY stock is because it is in fact cheap, and also because the company has made vast operating improvements. This is a stock that trades at just 10 times free cash flow, very cheap.
In other words, if Best Buy stock were to trade higher by 32% and keep free cash flow flat year-over-year, it would still trade at a rather conservative multiple of just 13 times FCF. This is one big reason why analysts are so bullish on Best Buy stock.
Beyond that, BBY has quickly gone from a company doomed by Amazon.com (AMZN) to one with its own large place in the consumer electronics retail space. BBY has cut costs, downsized, and while smaller, it is a company with consistent comparable store sales growth.
While Best Buy’s 0.8% increase in comp sales during its fiscal third quarter was disappointing to many, the company’s holiday earnings are likely to be much better.
Back in mid-November when BBY provided its holiday sales outlook, flat growth, retail sales were not looking all that great. MasterCard had said that retail sales in November rose 4.6% year-over-year, quite conservative given the increase in disposable income from lower gas prices.
But by the end of December, MasterCard revised its outlook, reporting that retail sales increased almost 8%. Therefore, December provided a big, unexpected bump that neither BBY nor analysts expected just one month prior.
This fact coupled with BBY stock losses in recent months and its cheap valuation suggest that right now is a great time to be long Best Buy stock. It also suggests that BBY will have a much better quarter than it expected just one month prior, thereby giving the stock a good change to regain some of its recent losses.
The bottom line is that now is a good time to own BBY stock.
As of this writing, Brian Nichols did not hold a position in BBY, but may initiate a long position within the next 72 hours.
