At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the "best"...
Shareholders of Best Buy (NYSE:BBY) awoke to a shock this morning, when analysts at Bank of America blasted the retailer as an underperforming investment, and assigned a $9 valuation to the shares. With the company unlikely to benefit from a buyout by founder Dick Schulze at $25 a share, as once expected, this analyst is telling us Best Buy's more likely to lose a quarter of its value as buyout hopes evaporate.
I disagree. And I'll tell you why.
Historically speaking, betting against stock calls from Bank of America has been a great way to go broke in the stock market. Whatever you think of B of A as a company (and with the stock selling for just half its purported book value, it would seem most investors think little of it), this analyst has been simply stellar at picking stocks. Over the six years we've been tracking its performance, B of A has boasted a 96% record of accuracy on its picks. It's beaten the market by an average of more than 15 percentage points per pick. And to top it all off, B of A has gotten the majority of its recommendations right.
So... why tempt fate and argue against B of A being right this time?
Let's go to the tape
Actually, I've got a handful of reasons. While it's not without trepidation that I contradict B of A on this one, I'm not as scared of crossing the analyst on a "specialty retail" pick like Best Buy as I might be if B of A were picking something from the world of biotech, for example.
Why not? Fact is, Bank of America gets most of its better picks from biotechnology. According to our CAPS stats, the banker is crushing the market by an astounding 4,161-percentage-point margin of victory on its few dozen biotech bets. In contrast, in specialty retail, B of A scores only 28% for accuracy on its recommendations -- and its average recommendation actually loses to the market by about seven points. Put more simply: B of A is a brilliant biotech investor -- but it pretty much sucks at retail.
It's also dead wrong about Best Buy being a sell.
Valued at $4.2 billion today, Best Buy shares only look unprofitable. In fact, over the past 12 months, this company generated a whopping $2.5 billion in real cash profits -- free cash flow. As a result, when valued on this free cash flow that it generates, the company's currently selling for less than twice the amount of cash it generates in a year.
That's absurdly cheap for any stock, let along one squarely in the sights of a going-private buyout. It also tells me that Dick Schulze has every reason in the world to carry through on his plans to take private the company that he founded. I firmly believe the buyout will happen, and almost certainly at a price higher -- not lower -- than the one the shares command today.
Foolish final thought
I'm also of the opinion that things aren't quite so bleak for Best Buy as they may seem. While most analysts look at Best Buy and see a company on the decline, with earnings shrinkage as far out as the eye can see, I actually believe Best Buy's future is brightening.
Competition from the likes of Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), which undersell Best Buy largely by virtue of their ability to dodge requirements to collect state sales tax, is likely to moderate as efforts to pass a federal law requiring sales tax collection gain speed. (In fact, there was another op-ed urging passage of this law just today in the pages of The Wall Street Journal.) Meanwhile, in the bricks-and-mortar world, Best Buy's old rival Circuit City lies vanquished, while other "rivals" like Sears Holdings are simply outclassed by Best Buy's superior service.
In short, whether Best Buy shareholders win their profits from a quick buyout at a big premium, courtesy of Mr. Schulze, or by the more arduous route of persevering until America's sales tax regime is rationalized and Internet retailers are forced to compete on a level playing field with bricks-and-mortar -- either way, I see a bright future for Best Buy. And I think Bank of America is wrong to advise investors to sell it.
You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 276 out of more than 180,000 members. (For the record, B of A's CAPS rank is No. 2,928).
The Motley Fool owns shares of Amazon.com, Bank of America, and Best Buy. Motley Fool newsletter services recommend Amazon.com and eBay. 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.