Best Buy Too Crazy to Touch

This week, the company lost more than a third of its market value. You could just chalk it up to market overreaction and buy the dip, but this volatility could continue for a long time.

Jan 17, 2014 at 1:00PM

Best Buy (NYSE:BBY) was one of the great turnaround stories of 2013. After sales stalled out and the company's founder made a failed attempt to buy back the company on the cheap, shares rallied well into the triple digits. Its strategy of driving new customers into stores via store-within-a-store offerings with Apple and Samsung, along with a greater emphasis on omnichannel retailing, proved successful, generating higher same-store sales and a general reversal of previous misfortune. It was one of the most covered stocks of the year, which can only guarantee one thing -- the market will react hysterically to anything and everything that happens with Best Buy, including this week's earnings announcement.

Overreaction
The long run for Best Buy isn't pretty, and this isn't intended to defend the company into oblivion, but Thursday's near-30% sell-off in Best Buy's stock price was another case of Wall Street nonsense.

Best Buy reported its preliminary holiday sales figures and, like nearly every retailer we've heard from in the first few weeks of the new year, it wasn't a time full of Christmas cheer.

Comparable-store sales fell 0.9% year over year. Sequentially, the company had reported a positive figure from its third quarter, suggesting that the turnaround effort may have been more aberration than transition. Mobile sales grew 3.6%, which wasn't as large a number as in the third quarter. Overall, revenue was down 2.6%.

Thus, the market, which is controlled by the Cookie Monster, decided that Best Buy's market value was roughly two-thirds of what it had thought for the last six months.

A quick glance at the retail landscape shows widespread weakness. Even retailers that had been doing well throughout 2013 wallowed in a wintry shame along with the losers. This isn't, in itself, a sign that Best Buy's efforts have failed.

And the follow-up...
Without market hysteria, analysts wouldn't be able to go on TV and ask, "Does this create an opportunity  to buy?" Luckily, everyone played his or her part, and the question was asked incessantly.

The typical reasonable response to this situation is that Best Buy is a highly volatile stock to own at the moment. If you believe in the longevity of the electronics retailer, and if you can jump in at a sharp discount like Thursday's sell-off, then, sure, take advantage of the circus. At less than 10 times forward earnings, Best Buy is the cheapest it has been in months. And, yes, it will rebound from this week's crash.

But Best Buy will remain under the crazyscope for some time -- there may not be a chance for things to rationalize before Best Buy runs into its next round of problems a few years down the line. Remember the mantra that the market can remain irrational longer than you can remain solvent. Brick-and-mortar retail is under permanent attack from technological disruption and consumer preference. You can buy at a discount today, but you will play one of the worst games you can for the duration of your holding period: market timing.

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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. 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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