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BBY: Could We See a Quadrupler in Best Buy Stock?

Great strategy and execution power the rebound


Best Buy stock bby

If you had to guess the top-performing S&P 500 stock of 2013 to date … well, no one would blame you for not guessing Best Buy (BBY). But believe it or not, the brick-and-mortar retailer is the belle of the ball this year, with Best Buy stock up a whopping 260% this year.

That’s a stark turnaround from a tumultuous period from mid-2010 through the end of 2012 that saw BBY shares shed almost three-quarters of their worth, and a turnaround that analysts are increasingly believe in.

Most recently, Oppenheimer analyst Brian Nagel upgraded BBY from “perform” to “outperform” and slapped a $50 price target on Best Buy stock. That represents a roughly 16% premium from Thursday’s closing price, and more than 300% better than where BBY stood on Jan. 1.

Granted, most analysts are targeting a 12- or even 18-month time frame for their predictions. But considering BBY has been on a breakneck pace for all of this year — the stock is even up 10% in the past month while the S&P 500 wavered over the debt ceiling standoff — it’s not outside the realm of possibility that it could run that off by the end of this year.

That would be a quadrupler for Best Buy stock — and by any stretch of the imagination, that would be an astonishing run for a retailer that was in such disarray just one year ago that pundits were at least toying with the idea of eventual BBY extinction.

However, while Best Buy’s momentum has come in part thanks to several short squeezes throughout the year, actually business changes give a little substance to the revival and fuel hope that the BBY stock run isn’t quite over. For instance …

  • Hubert Joly’s mere ascent to the Best Buy CEO office in August helped spark optimism for the retailer, as Joly previously was responsible for explosive growth at Carlson Wagonlit Travel. He also stole away Sharon McCollum from Williams-Sonoma (WMS), and she is focused on improving Best Buy’s online presence, expressing that BBY must be a marriage of “bricks and clicks.”
  • Pricing changes have helped move more people into the stores, but foot traffic wasn’t BBY’s biggest problem. The problem was people showrooming — checking out merchandise at Best Buy, then buying it online at Amazon (AMZN) or elsewhere. But Best Buy instituted a “Low-Price Guarantee” policy that matched any price, and Brandchannel suggests the program was responsible for a 10.5% increase in online sales in the most recent quarter.
  • The “store-within-a-store” strategy adopted at Best Buy puts experts behind the sales pitch for Samsung (SSNLF) and Microsoft (MSFT) products, which in theory should help engage consumers and keep more of the purchases in-house as well.

Combine these efforts with relentless cost-cutting by closing stores and reducing employee levels, and you have a turnaround story at least on the bottom line. While revenues slightly declined last quarter, earnings surged (in part thanks to a generous year-over-year comparison). Perhaps even more encouraging was BBY’s $24 million in net operating cash flow and $1.9 billion cash position for the quarter, massive improvements on a year-over-year basis.

Trust me, there are plenty of worries ahead for Best Buy stock. Competition is fierce, and BBY just doesn’t have the same economies of scale of Amazon or Walmart, so it can only cut prices so far on the retail level. Cost-cutting across the business can only take you so far. And as the year ends, you have to wonder how many investors and institutions will sell off their BBY stakes to claim the large returns for their annual reports.

Best Buy earnings for Q3 are due to come out Nov. 19, and at least I believe in the Joly regime recording another quarterly win.

If that win is big enough? Yes, a $50 price for Best Buy stock is absolutely realistic.

Marc Bastow is an Assistant Editor at As of this writing, he was long MSFT.

Article printed from InvestorPlace Media,

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