Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Best Buy (NYSE:BBY) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Best Buy's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Best Buy's key statistics:

BBY Total Return Price Chart

BBY Total Return Price data by YCharts

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

(64.6%) vs. (237.8%)


Improving EPS



Stock growth (+ 15%) < EPS growth

(18.8%) vs. (249.8%)


Source: YCharts and Morningstar.
* Period begins at end of Q1 (Feb.) 2010, adjusted to April 2013 end.

BBY Return on Equity Chart

BBY Return on Equity data by YCharts

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts. * Period begins at end of Q1 (Feb.) 2010, adjusted to April 2013 end.

How we got here, and where we're going
Things don't look good for Best Buy today. The electronics retailer earns only one out of nine possible passing grades, and even that lone pass was granted more on a technicality than on a genuine improvement. Despite this weakness, Best Buy's shares have staged an impressive comeback over the past few months, nearly returning to even after a wretched multiyear decline. Is this rebound sustainable, or will Best Buy's fundamental weaknesses catch up to it in the end?

Most of our Foolish commentators certainly don't think so. Longtime contributor Rick Munarriz makes light of Best Buy's latest differentiation effort -- placing hundreds of Microsoft stores-within-stores across its franchise -- by pointing out that the same failed tactic recently got Ron Johnson ousted from the corner office at J.C. Penney. It's worth pointing out that a department store is not an electronics store, and J.C. Penney faces more diverse direct competition than Best Buy. On the other hand, it's not like Microsoft's new tablets and smartphones were must-have gadgets for the shopping populace. Are people really more likely to visit a Best Buy just to look at Windows 8?

It's also worth pointing out that both Apple and Samsung already have stores-within-stores in Best Buys. Fool contributor Anders Bylund calls the Microsoft addition the equivalent of "building a high-tech flea market," which is a great metaphor, and one I happen to agree with.

Fool contributor Tim Brugger also notes that Best Buy's efforts to compete with online deals at is wrecking its margins. Amazon's commitment to sales growth at (nearly) all costs is legendary, and its infrastructure is limited to central warehouses. A retail outfit trying to compete with Jeff Bezos might as well attach a big boulder to its ankle before starting that race, just to drive home the severity of its handicap. Fool contributor Travis Hoium notes that there's simply not much of a compelling reason to visit Best Buy rather than ordering online.

Is the surge warranted? Well, take a look at Best Buy's latest quarterly earnings. Does a 58% drop in net income and a 10% drop in revenue sound like compelling reason to buy shares today?

Putting the pieces together
Today, Best Buy has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.