Even Up 200%, Best Buy Shares Could Go Higher

For months, I've been writing about the turnaround taking place at Best Buy (NYSE: BBY  ) . It has been a core holding in my portfolio this summer, and has performed extremely well.

Best Buy shares moved even higher on Tuesday, rallying over 10% on an impressive earnings beat. Year to date, shares are now up nearly 200%.

Although shares have appreciated significantly, the retailer still has further upside.

Best Buy beats on earnings

The company beat analyst expectations on both the top and bottom line in the most recent quarter, making it the third consecutive beat. Same-store sales were down year over year, but Best Buy attributed that to its ongoing remodeling.

Hubert Joly, Best Buy's new CEO, has been able to rapidly turn around the company by cutting costs, selling non-core assets, partnering with electronics firms, and blunting the impact of showrooming.

In the most recent quarter, the company managed to reduce annualized costs by $65 million, while selling off its stake in Best Buy Europe for $526 million.

The case for further upside

Joly appears to have revamped Best Buy from an operational standpoint, which is no doubt helpful, but I continue to like Best Buy shares going forward primarily because of two trends:

  1. The marketplace is about to be flooded with new electronics
  2. The store-within-a-store model lets Best Buy leverage its real estate

Best Buy, as with any retailer, is dependent on the products it sells. If there are no hot electronics to buy, Best Buy isn't going to do well, regardless of how the company is being run.

But those new electronics are coming. Wearable gadgets, new video game consoles, 4K TVs and other new product categories are poised to hit the market in the near future, and that should drive sales to Best Buy.

Consider Samsung's (NASDAQOTH: SSNLF  ) upcoming Galaxy Gear smart watch. The device, which will likely be unveiled next month, represents something fundamentally new in the consumer electronics space.

Although smart watches already exist, most consumers are not familiar with them. Consequently, they're probably going to want to see them in person before they buy.

Where will they go to check the Galaxy Gear out? Very likely Best Buy, with its mini Samsung "Experience Shops."

That brings me to my second point: by partnering with electronics makers, Best Buy has been able to turn its large stores, commonly considered a liability, into an asset.

As Samsung aims to compete more closely with Apple, it needs a retail presence. Sure, it could build its own network of Samsung shops across the country, but that would take years. The smartphone wars are dynamic and fast moving. Samsung doesn't have the time to build out a network of stores.

Enter Best Buy. In just a few months, by setting up shops in Best Buy, Samsung was able to get a "store" in nearly every major American community. Microsoft then copied Samsung, setting up "Windows Stores" in a majority of Best Buy locations.

This could just be the beginning. As Sony revamps its products, it might also consider partnering with Best Buy, as could Google. Even Amazon, with its expansion into hardware, could do a deal with its retail rival.

Rising tide to lift all boats?

Of course, if a wave of new electronics will soon pull consumers back into stores, investors might consider looking at some riskier plays in the space. Clearly, Best Buy is the best in its class, but greater return could be found elsewhere.

Specifically, RadioShack (NYSE: RSH  ) . To be clear, the company's present situation appears disastrous on paper. The ancient retailer has failed to adapt to the shifting tech landscape and is burning through cash.

Some analysts, like Wedbush's Michael Pachter, believe that the company will be out of business in less than two years.

That's likely why the company is trading at such a heavy discount. With a book value of $5.08 per share, RadioShack's sub-$3 share price seems to indicate that most investors are expecting the worst. Indeed, nearly 40% of floating shares have been sold short.

But that's why the potential returns could be so great. If RadioShack -- supported by a wave of new electronics -- can return to profitability, the upside could be huge.

Investing in Best Buy

Best Buy has been a great stock in recent months, but I'm not selling yet. Shares have rebounded largely on cost cutting and other corporate initiatives.

The real potential for the company lies ahead. A wave of new electronics will soon appear on Best Buy's shelves, pulling consumers back into the stores. Meanwhile, Samsung's success with its Experience Shops could prompt other companies to consider similar arrangements.

Best Buy has been one of the best stocks to own in 2013, and it could continue to reward shareholders going forward.


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