Avoid These Deja Vu Disaster Stocks

When former market darlings' share prices get severe beat-downs, it's very tempting to immediately think "value." Sometimes such stocks are bargains, of course, and make gutsy investors big money. However, beware when comparisons can be made to previous failed companies.

Here's what I mean. Best Buy (NYSE: BBY  ) is starting to remind me of long-gone Borders. Netflix (Nasdaq: NFLX  ) is starting to remind me of sad old Blockbuster. In other words, both companies are pretty darn broken.

Both Best Buy and Netflix were once the apples of many investors' eyes; I was super bullish on those two stocks years ago, too. I argue that today, these twin disasters have changed drastically, and not for the better. Investors should avoid both like the value traps they are.

Best Buy, buying the farm
There was a time when Best Buy was a force to contend with. It differentiated itself with its customer-centric strategy, which made other big-box retailers look incredibly old-school, not to mention predictably and sadly impersonal.

Best Buy also grabbed market share when rival Circuit City made all the wrong moves -- including switching to a low-pay, low-skilled workforce -- and ultimately went bankrupt. However, that easy market-share grab might have been the point when management became way too complacent.

Regardless of exactly when the turning point occurred, though, Best Buy is seeming more and more like Borders did during its long, drawn-out demise.

Borders conducted futile management shake-ups and could be accused of executive compensation concerns; for example, Borders sought permission to pay bonuses to executives even in bankruptcy.

Here, lately, some of Best Buy's executive compensation stunts have been raising eyebrows, and today we know Best Buy's showing some U.S. executives the door and giving a sour outlook regarding its current quarter. 

Best Buy's got just $680 million in cash and a whopping $2.23 billion in debt. Given continued revenue concerns, that could devolve into the kind of poisonous downward spiral that sucked Borders further down.

Best Buy's also been repeatedly accused of becoming nothing more than a "showroom" for Amazon.com (Nasdaq: AMZN  ) , which may be a bit similar to the public coming into Borders to page through magazines in cushy chairs without buying anything.

Like Borders, Best Buy could be accused of missing the boat when it comes to addressing a changing marketplace; Borders rival Barnes & Noble (NYSE: BKS  ) faced the same transformative consumer landscape, but at least it was swift to introduce the Nook e-reader, giving it a shot at being a contender instead of standing around like a giant deer stuck in headlights.

Netflix gets Blockbustered
Remember when Netflix stole the show from Blockbuster? Netflix revolutionized the industry, made life easy for its customers, and opened up a whole world of convenient entertainment through online queues and mailbox delivery.

Sadly enough, Netflix is currently being Blockbustered by the digital era. Fortunately, its management is aware that DVDs are going the way of the dodo. But Netflix's streaming service simply doesn't deliver the exemplary, exciting service that its DVD business did long ago.

I suggested it was time to "roll credits for Netflix" earlier this year, and I stand by it. Dig beyond the rock-bottom stock price and get the real story: the content. Netflix has lost some deals with important content providers, so some popular and timely TV shows and movies simply aren't available through its streaming service. In my personal experience lately, I've had far more luck finding some content I've really wanted to watch immediately using my Amazon Prime membership for streaming than using my Netflix streaming subscription.

My experience may be anecdotal, but somehow I doubt I'm the only Netflix customer who's thinking about ditching my subscription. At some point it's simply not worth it when you keep realizing content you crave now simply isn't there.

I reminisce about the days when Netflix bested Blockbuster by offering everything from hot new releases to obscure content that bricks-and-mortar video stores would never have bothered to carry. Sadly, though, those disruptive days feel long gone for Netflix; losing customer loyalty and goodwill is exactly what did Blockbuster in.

Deja vu disasters
Some investors might call both Best Buy and Netflix "cheap." Best Buy's trading at just five times forward earnings; however, that's not a bargain when you consider just how much trouble it's in in the current environment.

Meanwhile, Netflix's repeated share-price drubbings may make it look like a no-brainer value, but not so fast. Trying to fix its content issues is going to be costly. Further, Amazon isn't even the only company that offers instant gratification in the entertainment arena -- Hulu and Apple are right there waiting to entertain viewers, too.

This may be controversial, but I'd rather buy Amazon than either Netflix or Best Buy. Amazon never looks cheap, and some would say it's horrifically overpriced, but Amazon's tearing up both companies and many others as well. Amazon reminds me of nobody but, well, Amazon. Or maybe a great white shark.

The real logic disconnect in the marketplace may be investors' inability to see just how much Amazon can grow its forward-looking business that threatens and sometimes disrupts every industry it touches. Negative deja vu plays like Best Buy and Netflix are poisonous value traps; don't relive replays of previous disasters like Borders and Blockbuster.

Everyone knows Amazon is the big bad wolf in the retail world right now, but at its sky-high valuation, most investors are worried that its share price will get knocked down instead of competitors'. In our new premium report, we'll tell you what's driving the company's growth, and how to know when to buy and sell Amazon. Our report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

Alyce Lomax has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Best Buy, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Best Buy, and Netflix. 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. The Motley Fool has a disclosure policy.


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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 October 26, 2012, at 12:47 PM, DPRoberts wrote:

    I do not understand why Netflix doesn't offer pay-on-demand movies and TV shows for newer content. Like many (most?) Netflix users, I have a Roku box, which basically WAS a Netflix box. However, if I want the newest season of my favorite shows or the newest movies, I have to either go to Amazon (whose video quality and service have been, in my opinion, terrible), or hook my computer up to my TV to stream from iTunes (which is a pain). If Netflix offered Pay on Demand, I'd have no reason to go elsewhere. Instead, Netflix is forcing me to go to their rivals.

  • Report this Comment On October 26, 2012, at 2:32 PM, chopchop0 wrote:

    While I agree that BBY and NFLX scream "value" trap, I'm not sure I'd run into the arms of AMZN. As the sales tax issue gets resolved in more states and you see the rise of same-day service and pay with cash at WMT, along with initatives at TGT and EBAY, AMZN is going to have plenty of competition to contend with.

  • Report this Comment On October 26, 2012, at 3:47 PM, Corporality wrote:

    Spooky intuition with steel trap logic delivered with charm. Takes the sting out of being proven wrong.

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