Why the S&P 500 Is Thrashing Best Buy and GameStop

Take one look at the worst performing stocks on the S&P 500 (SNPINDEX: ^GSPC  ) this year, and you can't help but notice how many retailers are among the index's biggest laggards. Most notably, Best Buy (NYSE: BBY  ) and GameStop (NYSE: GME  ) come in near the top (or bottom?) of the list.

On a superficial level, the reason shares in these companies are performing so poorly boils down to one thing: a dismal holiday shopping season. As you can see in the following chart, both stocks fell off a proverbial cliff in the middle of January.

BBY Chart

GameStop's decent began on Jan. 14, when the company announced a "greater than expected" decline in video gain sales. According to its press release at the time, Xbox 360 and PlayStation 3 sales dropped by 22.5% on a year-over-year basis. Despite this, CEO Paul Raines touted, "Our outstanding execution during the holidays resulted in GameStop securing the number one market share position in the U.S. and in most of the countries in which we operate today."

Meanwhile, Best Buy reported a similar lackluster performance on Jan. 16. Domestic same-store sales at the electronics giant dropped by 0.9% during the holiday season. "When we entered the holiday season, we said that price competitiveness was table stakes and an intensely promotional holiday season is what unfolded," said CEO Hubert Joly.

Needless to say, neither company has been able to recover from the resulting precipitous drops. As of Friday, Best Buy is the absolute worst performer on the S&P 500 this year thanks to a 36% decline, while GameStop's 17.7% drop has led it to underperform 482 of the index's 500 components. By contrast, even after last week's slaughter, the S&P 500 itself is only marginally lower for the year.

What does this mean for the two companies going forward? Beyond the most recent holiday shopping season, these companies' prospects simply aren't bright. Best Buy continues to experience acute price competition from online retailers like Amazon.com and big-box discounters such as Costco, neither of which is likely to let up anytime soon. And GameStop recently learned that Wal-Mart has entered one of its most hallowed markets: selling used video games.

The net result is that both companies appear to be dead in the water in terms of their businesses and, for the same reason, as investments.

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