Best Buy (NYSE:BBY) has been among the best retailer stocks to own in 2020. Even with a recent fall, based on valuation, the Best Buy stock is up 29% so far in 2020. Shares are due to open Nov. 12 at about $115 each as they regain their footing.
But the stock is still relatively cheap. Its market capitalization of $29.7 billion is just 18 times earnings and two-thirds of its annual sales. There’s also a 55-cents per share quarterly dividend, currently yielding 1.95% compared to 30-year bonds yielding 1.75%.
While readers eagerly devour Best Buy’s Black Friday circular, with 39-inch TVs as low as $100, it’s a good time to see if the stock belongs in your Christmas stocking.
Why Best Buy Survives
As Ulta hires beauty experts who can help you develop your look, Best Buy does repairs, installations and service contracts. Its game here has improved. After I ordered a new car radio recently, a coordinator called back to manually juggle my appointment when the installer got sick. Systems doing in-store and online ordering don’t yet communicate smoothly. But Best Buy is learning.
The installer works for Geek Squad, which BestBuy acquired in 2002. The unit, based near Louisville, provides both in-person and phone support, from stores and in cars. This creates value for its extended warranties and makes service a profit center.
The Geek Squad helped keep Best Buy from being pulverized by the rise of e-commerce and the sturdiness of modern electronics. They gave the company time to develop its own web store. The company, which began as a consumer electronics store offering TVs and stereos, now sells everything from computers and refrigerators to printer supplies. When CDs and DVDs were a thing, Best Buy stocked those, too.
Best Buy Stock Risks
Christmas remains the primary season for Best Buy. During the most recent fiscal year, net income for the January quarter, $2.84 per share, represented nearly half its total. Revenue was 50% higher than for any other quarter as well.
That means Christmas is a risk for Best Buy stockholders, especially this pandemic Christmas.
The big box retailer is doing all it can. It’s extending the Christmas season, turning Black Friday into Black November. Sale prices started appearing in October online while in-store sales started Nov. 1. The company also started offering “lower-than-Black Friday” prices on its web site last week. While requiring shoppers wear masks and enforcing capacity limits in stores, it’s trying to compensate with new “customer experience hosts” to direct shoppers, adding more curbside pickup and delivery options.
Analysts are divided on whether all this will work. The average price target for 12 months out is just $8 above its current price. Analysts are narrowly divided between those who say buy and those in the wishy-washy hold category.
The Bottom Line
Now might be a good time to buy some Best Buy stock, before hedge funds jump back in.
Zack’s was calling Best Buy an “outstanding pick” in early October, before its recent fall. Its price-earnings ratio and dividend look better than those of Target (NYSE:TGT) or Walmart (NYSE:WMT). The company ranks well on environmental, social and corporate governance measures.
A good company selling for less than its peers always looks like a bargain. Best Buy’s recent 12% decline fall looks like profit taking, which means you can step in and take some.
At the time of publication, Dana Blankenhorn had long positions in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.