Is Best Buy a Value or a Value Trap?

On my browser home page I have about 120 stocks that I follow, to varying degrees. On a day like yesterday, when the Dow Jones Industrial Average (INDEX: ^DJI  ) jumped 4.2%, almost every stock was up and my screen was filled with green numbers. But Best Buy (NYSE: BBY  ) along with Target (NYSE: TGT  ) , two retail powerhouses, lagged the market and fell during trading yesterday. That usually spells opportunity for me, but is Best Buy a value trap?

The value
On the surface, the numbers look very attractive at Best Buy. The stock has just a 9.1 trailing P/E ratio, its forward P/E ratio is a lowly 6.9, and it pays a nice 2.4% dividend. With Christmas around the corner and Black Friday kicking off in style, you would think that a retail powerhouse like Best Buy with those numbers would be screaming "buy, buy, buy!"

Best Buy also has a competitive advantage over big-box and online retailers with its Geek Squad and other services. A consumer may find a cheaper product somewhere else, but the high-value job of installing and maintaining electronics will keep Best Buy relevant even as other retailers take sales.

The trap
As fellow Fool Austin Smith recently pointed out, it's not Best Buy or Target but Amazon.com (Nasdaq: AMZN  ) that's in the driver's seat this holiday season. Without brick-and-mortar stores to maintain, Amazon has been able to maintain lower prices than Wal-Mart (NYSE: WMT  ) , quite a feat for even online retailers. And as Amazon and its online peers grow, I worry that Best Buy will become just a showroom. How easy is it now to spot an item you like, price-check it, and even purchase it -- all from your phone?

There's also the proliferation of electronics at big-box retailers Best Buy has to be worried about. Best Buy used to be the only game in town for TVs, computers, and a variety of other electronics, but Target and Wal-Mart have changed that.

Foolish bottom line
The value looks strong in Best Buy's stock, but I just can't get too excited about a retailer that's had an anemic growth rate and whose market is being invaded by low-cost competitors. If Best Buy can leverage its service business and expand into electric vehicles and maybe even solar power, as I've suggested before, they maybe it will be worth another look. For now, Best Buy has "value trap" written all over it.

Interested in reading more about Best Buy? Add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium has no position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Wal-Mart Stores and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and Wal-Mart Stores, writing covered calls in Best Buy, and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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