Ring in the new year with more stocks for 2008.
With Christmas all wrapped up (or unwrapped, really), ask yourself whether you gave or received a consumer-electronics product this year. If so, there's a good chance it came from Minneapolis-based Best Buy (NYSE:BBY). I was pleased to recommend this exciting company in the August 2007 issue of Inside Value. Now, let me tell why you should vote for it to outperform in our Best Stocks for 2008 CAPS contest.
I admit that when I first wrote up the stock, I was unable to argue for why a competitor couldn't replicate Best Buy's franchise. But on the big-box-retailer front, I felt confident that Best Buy could differentiate itself. With the continuing convergence of music, gaming, computing, and communication devices, consumers' buying decisions are becoming increasingly complex. In such an environment, whom would you rather put your technology questions to: the sales clerk at Wal-Mart (NYSE:WMT) or Target (NYSE:TGT), or a trained employee at Best Buy, who spends all of his or her time selling the products you're looking for?
But what about Circuit City (NYSE:CC) or Radio Shack (NYSE:RSH)? After all, they sell the same products from the same brands through similar stores. Yet the numbers pointed to a differentiator: Best Buy's five-year average return on equity is 24%, while Circuit City's is just 2%. Since recommending it, and subsequently following it, I've firmed up my thoughts on Best Buy's competitive advantage, which I find to be based on two elements.
Know the business you're in!
First, even though it sounds like an obvious statement, Best Buy has shown that it has a better understanding of the business it wants to be in than Circuit City has. Not content to be a simple conduit for products between manufacturer and consumer, Best Buy helps its customers put together sets of products and accessories that will fulfill their specific needs. And because it helps manufacturers understand new and evolving consumer demands, the manufacturers can produce devices that are in turn exclusive to Best Buy. The company does carry some private-label products.
Once you know, do!
Second, Best Buy has built a culture and processes that are highly customer-oriented. Senior management understands that feedback from shop-level associates is extremely important, since those associates are the ones who speak with -- and, even more importantly, listen to -- the customer directly. Incorporating this feedback lets the company create offerings that answer its customers' explicit needs. This process has a second virtuous effect: The sales associate's role becomes more important and more interesting. It's no surprise, then, that Best Buy maintains low employee turnover rates in the industry.
If it's growth you're interested in ...
Investors always want to know about growth (value guys know that growth is one of the components of value), so I'll tease out two different opportunities. First, in February 2009, television broadcasters in the U.S. will be giving analog the boot. Do you know what that means for you? If you don't, you're not alone. Whom will we all turn to? The largest -- and, arguably, most respected -- specialty retailer of consumer electronics in the U.S. might be the logical place to start.
Best Buy also has good potential for worldwide growth. It currently has 150 stores in China (compared with nearly 950 in the U.S.), a market that holds great potential as the Chinese middle class increases. In its latest earnings release, the company raised the number of expected store openings worldwide to 150 over the next year, up from a previous forecast of 130 to 135. Even in the U.S., which some analysts feared was near saturation, Best Buy opened 45 stores in the past quarter alone. True to its Midwestern origins, the company is run in a prudent and deliberate manner, so I don't think these numbers are a sign of hubris.
Get out the vote!
How will the stock perform in 2008? The short answer is, I don't know. One year is simply too short a time horizon to make prognostications. However, I'm confident that the business will continue to deliver outstanding results and compound its intrinsic value. If that happens, odds are that share-price gains will follow, and that's why this stock is one to buy for 2008.
Are you convinced? If you want your voice to be heard in our Best Stocks for 2008 CAPS contest, vote "outperform" for Best Buy, as The Motley Fool edges Iowa by four days with our very own stock election.
Alex Dumortier owns shares of Wal-Mart, which is an Inside Value recommendation, but not in any of the other companies mentioned in this article. Best Buy is a Stock Advisor and Inside Value recommendation. The Motley Fool has a disclosure policy.