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A Case for Letting Founders Run the Show

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There's something special about investing in a company whose founder is still running the show. Heck, I get excited when I see a CEO who's been around for more than 10 years, shunning the management churn and burn that's so common these days. That's why I'm taking a fresh look at Best Buy (NYSE: BBY  ) , in light of founder Richard Schulze trying to get back into the game. Schulze has redoubled his takeover bid, and I hope he wins out.

The beauty of founders
Let's not kid ourselves, most businesses are doomed to failure, and no amount of founder gumption is going to make a difference. No, you can't sell Mr. T medallions in retirement homes – but, somehow, you can make a fortune off selling tap water in a bottle. A good leader doesn't make an inherently bad business into a good one. But a good founder can see the potential in a company that no one else sees. Especially in companies that succeed at their basic task.

Take Amazon's (Nasdaq: AMZN  ) Jeff Bezos as the visionary founder. He starts an online bookstore, and thinks that maybe he can do a bit more with it. Eighteen years later, it's one of the biggest cloud computing companies in the world. It sells streaming videos, books are still in there, and it's managed to turn the electronic book from a dream into a real, viable consumer product. Thanks, Jeff.

But Best Buy is in a different position. It was strong, then it fell, and now it's floundering, as the market changes around it. Oh, hello Howard Schultz. While Schultz didn't open the original Starbucks (Nasdaq: SBUX  ) cafe, he did found the company that we now know as Starbucks. When he stepped aside in 2000, the company and the stock started to slide. From the end of 2000 to 2006, the stock ran up from around $11 to almost $40 -- and then it fell.

Management ran out of steam, the company lost its focus on customers, and it had expanded its footprint without much thought. Sounds like Best Buy to me. By the end of 2008, the stock was below $10. Schultz stepped back up, and refocused the company on providing the service that it was meant to provide. The company thrived, and now it's trading close to $50.

The ugliness that's Best Buy today
Best Buy is having its Starbucks moment, as we speak. Over the last five years, the stock has traded as high as $50, the company has bounced back from the edge of bankruptcy, and now it's sitting around, watching its market-share, brand value, and revenues decline.

Schulze has now recommitted to purchasing the company's outstanding shares at $24 to $26 per share, in cash. That would value the company close to $9 billion, even though its current market value is under $7 billion. If he's successful in his bid, Schulze is going to have his work cut out for him. Last quarter, revenue inched up slightly to $11.6 billion, but same store sales continued to slide, dropping 5%. The company has allegedly suffered showroom syndrome, with customers coming into stores to see and try out products, only to go home and buy them from Amazon.

The bottom line
There are counterexamples, of course. The fun one being Martha Stewart's Omnimedia (NYSE: MSO  ) . Over the five-month period of her incarceration, the company's stock price jumped 80%. In the five months after her release, it fell 26%. Schulze has had at least one ethics violation, while he was the chairman of the board, so perhaps his case is more akin to Stewart's than to Schulze's. 

I think Schulze has it in him to make something better out of Best Buy. The company still has a meaningful brand, it's still making money, and it hasn't fallen as far as RadioShack in terms of reputation. I'm optimistic about Best Buy's future, and at a forward P/E of only 5.5, it's not an overly expensive wager to place.

Best Buy is fighting its way back up the hill, which makes it a potential winner. But the Fool has picked out another stock that's already winning, and detailed its rise in our special report on The Motley Fool's Top Stock for 2012. The year is slipping by, but this is still a good one to look at. You can get your free copy right here.

Fool contributor Andrew Marder does not own any stocks mentioned in this article. When he's in jail, his house is much cleaner. The Motley Fool owns shares of Best Buy, Starbucks, and Motley Fool newsletter services have recommended buying shares of and Starbucks. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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