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Best Buy: The Drama Queen’s Saga Continues

Electronics retailer shares spike, then fall, on Schulze bid flopping


Some people are drama queens. You know this type of person. Jubilant one moment, then depressed the next over all sorts of personal events that push and pull their lives in different directions.

Well, some stocks can be drama queens, too — surging one day on the hope of a positive development, then tumbling the next when those hopes are dashed.

Best Buy (NYSE:BBY) is a drama queen.

The past two trading days highlight this assessment beautifully.

On Thursday, the embattled electronics retailer’s shares soared nearly 16% on very heaving trading volume on route to their biggest gain in about four years, after news that the company’s founder, Richard Schulze, was planning to submit a bid to buy the company by the end of this week.

A report in the Minneapolis Star Tribune prompted the frenzied buying in BBY. The article states that last weekend, a Schulze-led group of investors secured agreements to finance a buyout deal from bankers and private equity investors, including Cerberus, Leonard Greene & Partners and the Texas Pacific Group. The report also said that on Thursday, Schulze met with his top advisers, including former Best Buy CEO Brad Anderson and former president Al Lenzmeier, to put together a proposal.

Now, I can understand how a news report like this would prompt buyers to pile into BBY. After all, Wall Street has fond memories of Schulze, and rightly so.

Schulze is the founder and former chairman who started Best Buy with a single store in St. Paul, Minn., in 1966. Under his stewardship, Best Buy bloomed into a retail titan, with more than $50 billion in annual sales and more than 100,000 employees. He also managed to preside over the company’s 30,000%-plus share surge up from humble beginnings through its 2006 all-time high.

Of course, competitive pressures from companies such as (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) have put the screws on Best Buy in the half-dozen or so years since, and that has led to anemic sales growth and plunging share values. In fact, selling pressure in BBY has cratered the stock more than 60% over the last 24 months.

The troubles at Best Buy have prompted Schulze — still the company’s largest shareholder with about a 20% ownership stake — to come to the conclusion that the only way the company will survive is if it goes private. This would permit the restructuring needed without management having to answer to shareholders.

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Unfortunately for BBY shareholders — and especially for traders — the real drama kicked in on Friday, when Schulze and his colleagues were granted more time to put together a buyout proposal in front of the looming Dec. 16 deadline. That extension sapped the life out of Wall Street’s hopes for a big deal, and the result was a 15% dive in the shares today that essentially wiped out Thursday’s gains.

The new deadline for this deal is Feb. 28 — not coincidentally the date Best Buy is scheduled to report the all-important Q4 earnings, which of course includes holiday sales.

Now, the smart money (including myself) thinks that Schulze and Best Buy will come to a deal, but that certainly doesn’t mean you should buy BBY.

You see, whenever you are dealing with a drama queen stock like BBY, there always seems to be some type of twist that takes investors from elation to desolation faster than you can react. That’s what happened from Thursday to Friday, and it could well happen several times more before the company eventually goes private.

The bottom line here is that only those who are willing to risk some “play money” should venture into BBY at this stage, because, in my opinion, there’s just way too much drama here.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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