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2 Stocks to Watch: Best Buy Surprises; Tesla Motors Capitalizes

By Alex Dumortier, CFA – Feb 27, 2014 at 7:00PM

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Best Buy's turnaround is on track, while Tesla Motors takes advantage of its soaring stock

Stocks achieved a new all-time high on Thursday, as the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.45%) both rose 0.5%. Although the S&P 500 set a new intraday high earlier this week, today's was the first closing price to exceed the previous high, set on Jan. 15. One factor that may have contributed to positive sentiment: A stellar performance by new Fed Chief Janet Yellen before the Senate. Yellen is beginning to differentiate herself from her predecessor, Ben Bernanke, saying she "would not argue" with economists who maintain that low rates contributed to the housing bubble (Bernanke maintained they didn't.) Among the stocks in the news today, electronics retailer Best Buy (BBY -1.41%) surprised positively on earnings, while growth darling Tesla Motors (TSLA -0.19%) is capitalizing on its runaway share price with a $1.6 billion convertible debt offering.

Best Buy is on track, but questions remain
Last November, I panned what I called Best Buy's "scorched earth" holiday season strategy, which consisted of removing price from consumers' decision-making process with regard to the selection of a retailer by matching the prices of its most aggressive rivals, including Wal-Mart Stores and The market certainly appeared to share that view -- the stock has lost roughly a third of its value since then.

However, today's fiscal fourth quarter results suggests that I, and the market, may have been too harsh on Best Buy. To be sure, if the retailer's strategy was to talk analyst estimates down following the holiday period so that they could go on to over-deliver, they were extremely successful, as the consensus estimate for fourth-quarter earnings per share fell from $1.62 in late December to $1.01 after the company's January update. That set Best Buy up for a significant beat, as adjusted EPS came in at $1.24, with EBIDTA (earnings before interest, taxes, depreciation, and amortization -- a measure of cash flow) of $815 million also beating the consensus estimate.

That success comes from Best Buy's work to get really lean -- at an annual run rate of $775 million, its cost-cutting efforts exceeded expectations in the fourth quarter. CEO Hubert Joly is now aiming for $1 billion in annual cost cuts, which would set the company up to compete more effectively in a knock-down war with other big-box and online retailers.

Still, it leaves an open question of where growth will come from. Revenue missed expectations, falling 3% in the quarter -- the fourth decline in as many quarters -- with same-store sales off 1.2% (Best Buy claims that it gained market share, however, as the sector contracted more sharply than it did.)

I think there is still room for a well-run retailer focused on consumer electronics, but that isn't a certainty. At 12.9 times the next 12 months' earnings-per-share estimate, Best Buy doesn't look like a horrible bet, and its turnaround looks like it's on track; still, I've said this before: For individual investors, there are easier (and safer) ways to earn a return than turnaround investing.

Tesla: A Giga-bond sale for a Gigafactory
Tesla Motors announced a $1.6 billion convertible note offering after yesterday's market close. Given the huge run-up in the stock, it's not surprising that the company is raising capital. Hang on, though: What does the stock price have to do with a debt offering? Well, the conversion feature, which may enable investors to exchange the notes for common shares, means Tesla can sell the notes at a low yield.

Tesla's stock fell 0.2% from yesterday's all-time high, but make no mistake about it: It's overpriced, CEO Elon Musk knows this, and he is (smartly) looking for way to take advantage of that. This debt offering fits the bill. Tesla's management is once again proving their worth to the company -- but that doesn't mean the shares are a value.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Tesla Motors. We Fools don't 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.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,347.03 (0.45%) $152.97
Best Buy Stock Quote
Best Buy
$81.23 (-1.41%) $-1.16
Tesla Stock Quote
$182.86 (-0.19%) $0.34

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

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