This Company's CEO Is Selling Shares...Should You?

Best Buy (NYSE: BBY  ) , the nation's largest big box electronics retailer, has had quite an impressive run this year (shares are up 220% year-to-date). New CEO Hubert Joly can be thanked for much of the revitalization of the business, but his recent actions could take the stock lower.

Hubert is selling part of his stake in Best Buy
On Sept. 6 of this year, the new CEO sold 450,000 shares of Best Buy for proceeds of $16.7 million. Mr. Joly's sales represent roughly 20% of his stake in the company.

Other insiders have been selling stock
There have been three other recent transactions that could support a peak in the stock price. On Sept. 4, EVP Keith Nelsen sold 12,748 shares at 37.86 per share. On Sept. 5, Treasurer Christopher Gould sold 7,225 shares at $37.37 per share. Most importantly, on Aug. 27, director Allen Lenzmeier sold 60,000 shares at $35.04 a share, for proceeds of over $2 million. Insider selling could indicate that the leaders of the business think the stock is fairly or over-valued.

Weak commentary on the last quarterly earnings call
On the latest quarterly earnings call, CFO Sharon McCollam highlighted some tailwinds that are coming in the back half of the year:

There are two additional back half impacts that are not investments, but that we would like to discuss. The first is a temporary increase in our mobile warranty costs that is expected to continue through the first quarter of fiscal 2015. This increase is considered temporary because it relates to higher claims frequency on our legacy Geek Squad protection programs that will expire or be operationally restructured out over the next several quarters. The second is a change in the economics of our private label credit card program that is being sold by Capital One to Citibank in the third quarter. This impact is due to the expiration of our previous credit card agreement with Capital One, which offered Best Buy substantially better financial terms than what is commercially available in the market today due to changes in both the regulatory environment and the general consumer credit market overall. 

Competition
Can Best Buy continue its out-performance with the likes of Amazon.com (NASDAQ: AMZN)Target (NYSE: TGT), and Wal-Mart (NYSE: WMT) breathing down its neck? Each of these three companies offers electronics at a lower price point, but to Best Buy's defense, the company has been promoting a strategy to mitigate the risk of competition. Taking on Amazon, Best Buy has been pushing its Price Match Guarantee in its recent TV campaign. Amazon is also thought to have a competitive advantage on delivery, and has bee recently pushing its Amazon Prime product. Best Buy is also offering free shipping and a strategy of "if you don't like the TV you bought we will come out and switch it with another one." I think this is a good move to offer convenience, which is one of the perceived competitive advantages of Amazon.

Best Buy has been up front about its competition against Target and Wal-Mart. The mass merchants do offer goods at a low price, but they also offer lower quality. Best Buy's niche is in the higher-end, higher margin segment of the electronics space and the company believes they service a different consumer than Target and Wal-Mart. But, there has been a trend during the recession in the TV space that the consumer cares more about the size of the TV than the added functions, which is a big negative for Best Buy (Target has even acknowledged this point of differentiation).

Wal-mart is also looking to compete against Best Buy in the smartphone by introducing its own trade-in program. Best Buy already has had this program in place, and the smartphone business is Best Buy's most profitable segment.

Overall, Best Buy is trying to differentiate itself from these competitors, but the competition still has an edge of price on the low end, and in-home convenience on the high end. Either way, with the recent run-up in the stock, this competition is something that investors should take note of.

Conclusion
Considering the recent insider selling, increased competition, and headwinds coming in the back half of the year, investors should reevaluate the merits of an investment in Best Buy at these current levels. Best Buy's stock price has had an incredible run this year, but it may not last much longer.

Editors note: A previous version of this article incorrectly stated Mr. Joly's share sale as a percentage of his remaining stake in the company. The Fool regrets the error.


Read/Post Comments (5) | Recommend This Article (1)

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 September 19, 2013, at 3:19 PM, Tribat wrote:

    He had to pay his wife since they were getting a divorce. It was like a 3 second Google search away. Research more next time please.

    http://money.cnn.com/2013/09/11/news/companies/best-buy-ceo-...

  • Report this Comment On September 19, 2013, at 4:06 PM, mistacy wrote:

    Tribat,

    We all know the reason Joly gave as of why he sold half his stake.

    There is no need to denigrate the writer of this article.

    Why are you turning a blind eye to the rest of the article? Several other high ranking BBY employees have sold decent amount of stocks recently. Even BBY founder is about to sell a huge chunk of his shares (if not all of it). Schulze says he wants to diversify. What does that mean? It sounds like he thinks BBY has run its course & it is time to cash out to find other more lucrative investment.

    It doesn't take a very intelligent person to comprehend the meaning in between the lines.

    Find whatever excuse you will, the fact that they are selling instead of buying is an indicator not to take lightly.

  • Report this Comment On September 20, 2013, at 1:54 PM, dio44 wrote:

    Tribet has a very valid point. The author chose to exclude the facts in the same way mistacy chooses to pretend this handful of officers represents the total officer population.

    Simply consider they sold near $37 when the stock closed over $39 yesterday. They gave up more than most readers will make this year on a single transaction and the thought process is they know something worth reacting to?

    This article is purposely misleading and subjective based solely on a misinformed opinion almost purposely avoiding the facts. Dick is a billionaire with a massive percentage of his wealth tied up in a company up over 200% this year and the fool challenges his move might mean something?

    Try harder next time and stop wasting the readers time.

  • Report this Comment On September 20, 2013, at 2:16 PM, mistacy wrote:

    "mistacy chooses to pretend this handful of officers represents the total officer population"

    "several" = "total" to you dio44?

    Twisting meanings & misrepresenting statements is your forte apparently.

    Using pompous arguments as reasonable & patronizing others might make you feel good,

    but you waste as much time writing, as the readers reading.

  • Report this Comment On September 20, 2013, at 3:00 PM, dio44 wrote:

    It's simple. Read the headline and read the link posted. The CEO in question is selling for a very specific reason, which was reviewed and approved. A sell which forfeited future profits as the stock continues to trend positive.

    The article has little merit under the title it was given. That isn't taking a jab at the author, it's the point that bait and switch headlines are not needed. Most of the content was fine, but implying something is amiss while avoiding other facts is fine when coming an opinion... wrong when being published.

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