Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Good news for Best Buy
So what: Thinking about this logically, if two companies are rivals and one does better than expected, you might expect this to mean it stole market share from its rival -- bad news for hhgregg. On the other hand, it's just as logical to figure that if investors were worried Best Buy would do poorly in a poor retail environment, good results from Best Buy could portend better sales for everybody in retail, hhgregg included.
Now what: With hhgregg selling for 12 times earnings, pegged for 18% annual profits growth over the next five years, and now the recipient of maybe-good-news of faster-growing profits, a lot of folks will tell you the company's a screaming buy. I'm not one of those folks.
I find it worrisome that the faster hhgregg seems to grow, the worse its cash flow statement becomes. For years, hhgregg was a smart, free-cash-flow-positive operator. Last year, however, as store-opening costs ate up its cash, hhgregg turned free cash flow negative. GAAP profits are all well and good, but before I buy the stock, I'm going to need hhgregg to show me the money.
But that's just me. If you think hhgregg is as good a deal as many investors decided it was this morning, add the stock to your watchlist. See if this story plays out as planned.
Fool contributor Rich Smith does not own (or short) either company named above, but The Motley Fool owns shares of Best Buy and Motley Fool newsletter services have recommended buying shares of hhgregg and Best Buy. 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.