Please ensure Javascript is enabled for purposes of website accessibility

Best Buy Stock Could Be a Trap

By Rick Munarriz - Apr 6, 2013 at 1:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors have been rewarded for buying into the consumer electronics retailer this year, but Best Buy's stock has outpaced its fundamentals.

Best Buy (BBY 2.49%) is on fire, and I'm not talking about the stores. Its stock has now more than doubled in 2013 -- up 116% on the year, and up 15% on the week -- even though the consumer-electronics retailer's turnaround continues to be a work in progress.

That's not just my inner cynic pecking at the keyboard. Analysts see profitability slipping 17% this fiscal year on a 3% dip in revenue.

The stock has been rallying since a wave of analyst upgrades in February was followed by a better-than-expected holiday-quarter report in March. But let's not mistake surpassing expectations with growth. Best Buy's international operations are a mess. Margins are getting squeezed closer to home. Even the surprising 0.9% increase in domestic comps isn't as good as it may seem at first glance. Best Buy bakes online sales into its same-store-sales metric, so things wouldn't have been so hot if it weren't for Best Buy's 10% year-over-year pop in website sales.

Then again, even that 10% boost in online sales isn't necessarily anything to crow about. Rival Amazon.com (AMZN 4.03%) saw its holiday-quarter sales climb 22%.

Clearly, investors buying in today are more interested in Best Buy's future than in its past, but the news isn't very comforting on that end, either.

Best Buy stock popped higher on Friday on news that the chain will team up with Samsung to open Samsung Experience Stores inside its own stores. The Samsung-manned centers may fare well as an initial novelty, but does anyone remember the last retailer banking on the "store within a store" model to turn things around? Yes, J.C. Penney's (JCPN.Q) Ron Johnson has been busy giving fashion brands their own space to shine in the meandering department stores. The end result has been four consecutive quarters of plunging comps as confused shoppers head elsewhere.

An improving economy can naturally help mask some of the weakness here, but until sales start to improve materially and margins return to form, there isn't even a disguise here to throw us off.

Let Best Buy actually earn these past three months of gains before taking the bait. You're smarter than that.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$82.05 (2.49%) $1.99
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,221.55 (4.03%) $86.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.