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Best Buy Too Crazy to Touch

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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.

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.

A much more sane approach 
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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 January 17, 2014, at 5:12 PM, mistacy wrote:

    "Shares rallied well into the triple digits?"

    Numbers please.

    "30% sell-off in Best Buy's stock price was another case of Wall Street nonsense?"

    Do you think last years BBY rally was sensical?

    "And, yes, it will rebound from this week's crash."

    What do you mean by rebound?

    1% up then 10% down?...

    I read the rest of your article.

    Its very mish mushy at best.

    The synthesis coming out of it

    is more about the fact that the market

    tends to be irrational & not predictable.

    Well thank you for the wisdom.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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9/1/2015 4:06 PM
BBY $35.44 Down -1.30 -3.54%
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