Nearly two months ago, I noted several interesting short-sale prospects. One was Best Buy (NYSE:BBY), which was trading at about $30. At the time, the short interest was 37.2 million, or 11.6% of the float – short-sellers were definitely seeing the potential for a great trade.
On Wednesday, Best Buy hit a 52-week low of $26.42. Keep in mind that the stock was around $45 just last Thanksgiving.
Could the stock be near a bottom? After all, Best Buy shares have now fallen to a price-earnings ratio of only 9 and the dividend is at 2.3%.
Then again, the retail industry can be brutal. Not long ago, companies like Blockbuster, Borders and Circuit City looked like smart value plays. They eventually went to zero.
This probably won’t be the outcome with Best Buy, but there could certainly be more room for short-sellers to make money. That’s because great short-sale prospects involve companies that are experiencing disruptions to their core business model. For example, Netflix (Nasdaq:NFLX) essentially killed Blockbuster. Or, in the case of Eastman Kodak (NYSE:
EK), it got busted by the emergence of digital cameras and smartphones.
In the case of Best Buy, it’s facing a similar problem: the relentless march of e-commerce, with its key nemesis being Amazon.com (Nasdaq:AMZN). In its latest quarter, Amazon posted a stunning 51% increase in revenue to $9.9 billion.
What did Best Buy do? Revenue increased a mere 1%, while comparable-store sales were off 1.7%.
And Amazon has continued to push innovation – it’s getting traction with the Kindle and its web services. There are also new offerings, such as a music service as well as a tablet.
What kind of innovations has Best Buy launched recently? Not many. Rather, it looks like the company is mostly interested in social media marketing, dividends and share buybacks.
Yet the biggest problem is that Amazon is getting tremendous momentum with its electronics and general merchandise segment, which surged 62% in the latest quarter. In other words, more consumers prefer to purchase things like computers, big-screen TVs and other devices from the Web. It’s cheap and convenient. Besides, Amazon has great customer service and innovative programs like Prime shipping, which encourage repeat purchases.
I don’t think Best Buy will go away. The company still generates a lot of cash flow (at least for now). But over the next few years, there will be tough pressures on market share and margins, which will certainly be a drag on the stock price.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
