Retail stocks plunged in March as the novel coronavirus pandemic shut down the U.S. economy. Best Buy (NYSE:BBY) stock was no exception. From its February highs to its March lows, BBY stock shed about 50%.
Then the rebound started.
From its March lows, Best Buy stock has rallied more than 60% to nearly $80 in late May on hopes that the U.S. economy will reopen and rebound over the next few months.
That’s exactly what will happen.
An overwhelming amount of data emerged over the past few weeks which illustrate that not only is the U.S. economy reopening, but that U.S. consumers are more than ready to get out and spend again. Because the U.S. economy is built on the back of consumer spending (it accounts for about 70% of GDP), rebounding consumer spending trends over the next few months will support a strong economic recovery.
Against that favorable backdrop, Best Buy stock should rally all the way back to $90. That means Best Buy stock is one of the best retail stocks to buy as the U.S. economy reopens over the next few months.
The U.S. Economy Is Rebounding
A wave of recent data supports the idea that the worst of the coronavirus pandemic is over, the U.S. economy is reopening, and U.S. consumers are ready to fuel a strong economic recovery.
Consider that:
- Pandemic hysteria is fading, as the number of Americans that categorized themselves as “extremely worried” about Covid-19 has dropped from 28% in late March, to 23% in late May, according to a Statista survey.
- The economy is gradually reopening, with states such as Arizona, Georgia, Florida, and Texas getting back to “business as usual.”
- The economic reopening has illustrated that there is ample pent-up demand from consumers, as beaches and restaurants were very crowded this past Memorial Day weekend and malls have reported strong early reopening traffic trends.
- Consumer confidence levels have already bottomed at surprisingly high levels (about double where they bottomed in 2008/09), despite ugly labor market conditions, because most consumers who were fired during this pandemic (87%) expect their layoff to be temporary.
It doesn’t take a rocket scientist to connect those dots. Over the next few months, the U.S. economy will reopen, consumers will get back out there and spend money, and the entire economy will rebound.
Best Buy Is a Strong Retailer
Naturally, rebounding consumer spending trends will benefit all retailers over the next few months. But Best Buy is a standout in the retail industry.
Prior to Covid-19, Best Buy leveraged robust and growing demand for consumer electronics and its in-store expertise to drive consistently positive comparable sales growth — a rarity for a physical-first retailer. Best Buy had also developed a robust e-commerce channel and widespread omni-channel capabilities, the sum of which were driving big online retail sales growth.
Meanwhile, during Covid-19, Best Buy pivoted to a curbside-only operating model in March. That helped the company reduce labor expenses and retain 81% of its sales in the last six weeks of the quarter. The company has since added appointment-only, in-store consultations. This move is yet another smart, low-cost move for the company to recapture lost sales.
Post-Covid-19, Best Buy’s stores will reopen. Demand for consumer electronics will only grow, supported mostly by the widespread proliferation of the Internet-of-Things and the commercial roll-out of 5G and 5G smartphones. The company will get back to consistently positive comparable sales growth with stable margins and steady profit growth.
In other words, Best Buy is more than just a retailer ready to bounce alongside rebounding consumer spending. It’s a winning retailer with long-term staying power and strong multi-year growth prospects.
The Stock Will Rally to $90
Best Buy’s strong multi-year growth prospects are not priced into Best Buy stock today.
Post-fiscal 2021, Best Buy should sustain healthy, 2-3% revenue growth per year, as more and more devices become “smart” and more products find themselves on Best Buy shelves. Concurrently, margins should improve as management learns from its Covid-19 strategies, and implements more low-cost sales channels like curbside pick-up (which should reduce labor expense). Buybacks will come back into the picture, too, once sales trends normalize.
Low single-digit revenue growth. Slight margin expansion. Buybacks. That’s a recipe for steady, mid-single-digit profit growth over the next few years. Assuming so, my modeling suggests that $8 in earnings per share is doable for Best Buy by fiscal 2025.
Electronics retailers normally trade around 15-times forward earnings. Based on that average multiple and a 10% annual discount rate, a reasonable fiscal 2021 price target for Best Buy stock is $90.
Bottom Line on BBY Stock
The bull thesis on BBY stock boils down to three big things.
First, the U.S. retail sector is set to meaningfully rebound. Second, Best Buy is a standout in that rebounding sector. Third, Best Buy stock is undervalued.
Given those three truths, Best Buy stock is a strong stock to buy for the next few months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
