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Post of the Day
September 3, 1999

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Subject:

Re: BBY Drop

Author: montashigi

This exit action is breath-taking, but long-term BBY owners have seen worse. So far, it has bounced back every time and then some. That said, I do not subscribe to the theory that day to day price movements are completely insignificant, especially when it accompanies news. I believe the movements of stock prices often carry a message inside, and it is up to us to decipher that message and then decide whether it is valid. As far as I can see, these are a couple of the messages:

1) Analysts and investors have been pricing in same store sales matching last year's 17.9% into the stock. Those people were living in fantasy-land, of course, but high-flying, fast growing stocks often take a hit when past success puts a drag on future success. Dell sees this kind of stock hit periodically as investors fear the fat days are over. Given this message, we BBY holders have to decide whether we are going to be happy with 10%+ SSS numbers or if we are going to insist on 15%+ My own feeling is that even 10% is too optimistic, but you put that together with store expansions, and overall revenue growth can still approach 20%, and bottom line growth can top even that.

"The question dogging all successful companies is whether the good times can continue. Today's press release was perversely interpreted as answering in the negative."

2) A lot of investors seem to be spooked because the press release did not say earnings estimates are too low. That was interpreted to mean there will be no earnings surprise this time around. This sounds like a lot of tea-leaves reading to me, but I do remember that the company has given earnings warning in the past, so this might be true. Still, I hate to bet my money on what a company didn't say rather than what it did say. It could very well be that management has decided not to give positive earnings warnings anymore. It wouldn't be so bad if BBY merely meets estimates, which call for a 20% increase for the quarter, and close to 50% for the year. That would still be very powerful performance.

So these are the messages I read from today's drop. If anyone can tease more out of it, please post. The question dogging all successful companies is whether the good times can continue. Today's press release was perversely interpreted as answering in the negative. Since you and your son are looking to hold for 5 years, I'd say the company's expansion plans, business metrics, and the electronics industry's continued introduction of new products are what you should be most concerned with. All of those signs are bullish. The worst-case interpretation of today's stock drop is that the stock was overpriced by some pie-in-the-sky speculation. With your time horizon, temporary overpricing is not very important. Just bear in mind that the "significant unforeseen fundamental issues" you are looking out for can be information that comes to you wrapped in the stock price. Make your interpretations, decide on their validity, and then have the courage of your convictions. That's really all anybody can do.