Throw This Stock Away

The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Best Buy (NYSE: BBY  ) .

The song remains the same  
This has been a bad week for Best Buy, and I can't be the only one kicking myself for not spotting the disconnect earlier on.

When Circuit City liquidated last year, we wrote it off as an anomaly. Circuit City's leveraged balance sheet and bone-headed decisions did it in.When Best Buy failed to immediately deliver monster comps and ridiculous markups in the absence of Circuit City, we shook our heads and made recession the scapegoat. However, now that revenue, comps, and earnings dipped in Best Buy's latest quarter, the company is out of excuses. Blue shirts and khaki pants just aren't the fashion statement they used to be.

Sadly, Best Buy has become the seafood restaurant that taught its patrons how to fish. After all, once you sell someone a smartphone they can check Best Buy prices against cheaper alternatives online. Sell someone a web-surfing Blu-ray player, TiVo (Nasdaq: TIVO  ) , or video game console that can stream web content in the living room, and there's no longer much of an appetite to buy DVDs from the store.

In short, Best Buy has become a victim of its own success.

I'm not the only one that was caught by surprise. Analysts have now sorely overestimated Best Buy's earnings power in two of the past three quarters.

Best Buy isn't going to disappear anytime soon. It's not going to pull a Circuit City overnight. However, stock gains will be hard to come by as more investors realize the diminishing relevance of Best Buy.

You can do better than that.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

  • (Nasdaq: AMZN  ) : Once again, the Internet kills the bricks-and-mortar star. The leading online retailer doesn't run on the same fiscal calendar as Best Buy for a true Macs-to-Macs comparison, but Amazon's 39% surge in net sales in its latest quarter is huge. More than half of its sales are now coming from Amazon's electronics and other merchandise category, which soared by 68% during the period.
  • Funtalk (Nasdaq: FTLK  ) : It's not the gargantuan size of its stores that's hurting Best Buy, because RadioShack (NYSE: RSH  ) is also smarting as it trades a sneeze away from a new 52-week low. If investors want some octane in consumer electronics, their best bet may be to head abroad. Funtalk is a Beijing-based retailer of wireless phones and accessories. Retail revenue soared 42% in its latest quarter, though a good chunk of that came from acquisitions as Funtalk's empire expands to 662 stores. Earnings more than doubled. Value investors willing to take on Chinese risk will appreciate a growing consolidator trading for just seven times this fiscal year's earnings and six times next year's target.
  • hhgregg (NYSE: HGG  ) : It's problematic to find hhgregg also coming up short on the bottom line in two of its three latest quarters, but the chain's growth is impressive -- even as Wall Street curbs its expectations. Analysts see earnings growing 30% this fiscal year and 28% the following year. This comes as a sharp contrast to the projected earnings slip this year at Conn's (Nasdaq: CONN  ) and what we saw out of Best Buy this week.

I'm sorry, Best Buy. You're no longer the best buy.

Best Buy is a Motley Fool Inside Value recommendation., Best Buy, and HHGregg are Motley Fool Stock Advisor selections. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2010, at 6:33 PM, RavenandSunny wrote:

    Personally, I think the reason that Best Buy is not doing as well as it would like is because of their 15% restocking policy. I avoid buying there to avoid paying that fee if I find I have to bring something back. And I know a lot of my acquaintances feel the same way. Not a good business policy from a consumers point of view. I'm sure it was some executive's decision of the week, but it wasn't a good one in the long run.

  • Report this Comment On December 16, 2010, at 11:28 PM, DocG1956 wrote:

    I got stopped out of gregg. I am always glad I use stops. I carefully track stocks I get stopped out of and only 1 has went on to perform after I got stopped out. Buy and hold may be this sites policy but I can't do it without trailing stops.

  • Report this Comment On December 17, 2010, at 3:28 PM, Ironbob wrote:

    Um, you do know that Circuit City is back in business don't you? It's called Systemax; a combination of losing brick and mortar businesses that have recombined and gone completely web based.

    Best Buy needs to wake up. Any company selling electronics that wants to charge customers a 15% restocking policy is going to get smoked by Fry's.

    Stores like Fry's have their own set of miserable qualities but those qualities don't reach into your wallet and snap up your money because you don't like a product!

    So check this out, I go to Sears, buy a $1300 mattress (have to have a certain type or can't sleep) and they tell me, well you have 90 days to return it! 90 DAYS TO RETURN IT! So I sleep on it and if I don't like it , I have THEM pick it up and bring me a new one with no restocking fee at all!

    It's the same way with all of their merchandise! Store after store after store handle customers the same way but not BEST're special! No, we cannot just go out and get their merchandise anywhere because anywhere doesn't have people working there dressed all the same!

    Now with that; word of mouth can kill you. Thus far, I've cut my BB purchases WAY back and my family goes to Fry's or direct online for their computers and electronics.

    You do not succeed in the electronics business for long with that kind of policy.

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