At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
Friday was a pretty good day to be an investor, as most market averages ended "in the green." Or rather, it was a good day to be an investor in 'most anything but Best Buy
Why did Jefferies choose to "go negative" on Best Buy last week? Basically, because everything else it's seeing in the world of specialty retail demanded it. Citing channel checks on the electronics departments at Costco
Let's go to the tape
If history is any indication of the quality of Jefferies' advice, investors do have reason to worry. There simply aren't many investment bankers out there with better records in retail than Jefferies: According to our CAPS stats, this analyst has a record of 65% accuracy on its Specialty Retail picks, and scores an even bigger margin of victory in Internet and Catalog Retail -- 71% accuracy.
These numbers argue strongly in favor of caution on Best Buy, and suggest investors are right to worry that Jefferies is right.
Jefferies polishes its crystal ball
But I'm going to have to take issue with Jefferies' advice. I mean, are they right about electronics sales being weak right now? Well, this is a major investment bank we're talking about here. One with the ability to conduct channel checks at the drop of a hat, while the rest of us are furiously tapping into Google, trying to figure out just what a "channel check" is. (It means getting information on a company from an independent third party.)
If Jefferies tells us sales are weak right now, they probably are. But consider the italics. They're important. Jefferies says sales are weak right now. Fine. But based on that, the banker is looking way out into the future, not just slicing $0.08 off its expectations for Q2 earnings, but clambering further out onto a limb and reducing expectations for all of fiscal 2011 and fiscal 2012 by about 12%.
That, to me, looks like more of a stretch. I mean, just consider all the things that could change between now and then. Even if industrywide sales drop, Best Buy might sidestep the trend, increasing its sales by stealing market share from any of the bricks-and-mortar rivals Jefferies says are struggling, and from virtual competitors like Amazon.com
Simply put, there are a lot of levers Best Buy can pull to keep itself growing over the next two years, Jefferies' best guesses to the contrary notwithstanding.
Safety in numbers
Meanwhile, Best Buy's stock appears to price in the Jefferies jinx, and then some. Selling for just 11 times earnings, but expected by most analysts to keep growing profits at an 11.6% clip (and paying a 1.7% dividend for good measure), Best Buy already meets the threshold for "value stock" status.
Plus, the stock could be even cheaper than it looks on the surface. Free cash flow last year exceeded reported income by roughly 40%, meaning that today, post-Jefferies downgrade, you have the opportunity to own the premier name in electronics retailing for the low, low price of just 8 times free cash flow. How cool is that?
Foolish final thought
Times may be hard right now in the world of electronics retailing, but the good news here is that hard times often bring rock-bottom pricing on equities. That's the case with Best Buy's stock today. Don't let Jefferies' skepticism scare you off from a superb sale price on this stock. "Best Buy" is precisely what its name suggests.
