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Wall Street Jumps on the Best Buy Bandwagon

By Jim Pearce on October 14, 2016

Over the past three months shares of Best Buy (BBY) gained 25% while the S&P 500 Index declined by nearly 2%. The biggest part of that jump occurred on Aug. 23, the day after Best Buy announced better-than-expected quarterly earnings. And over the past three days it has tacked on more than 3% of appreciation during a period that the rest of the stock market has gone in the tank.

However, unlike a few months ago, when the impetus for BBY’s renewed popularity was the result of information coming directly from the company, this week there has been no news released from Best Buy’s P.R. department. Instead, glowing reports on Best Buy from several financial media outlets appear to have drawn attention to the stock as one of the few safe havens in the retail sector.

Also helping out was an analyst upgrade of BBY last week by a regional research firm  that specializes in advising pension fund portfolio managers. With so many retailers revising their future numbers down, Best Buy has emerged as one of the few bright spots in that sector with third quarter sales expected to grow by more than 1%. That’s a modest growth rate, but being able to grow sales at all in a market increasingly dominated by online giant Amazon.com has some analysts saying that Best Buy will be one of the few “big box” retailers to successfully defend its territory.

For that reason, it appears Wall Street’s perception of Best Buy is improving. Until recently, it was considered a marginal performer with limited growth potential, but after several quarters of solid performance it is increasingly regarded as being a core holding for most large-cap growth portfolios. That’s good news for two reasons: not only does it drive up demand for BBY in the near term, but since institutional investors tend to hold stocks for years instead of months, it also provides more price stability in the long term.

Price stability is something Best Buy has not enjoyed lately. From 1996 to 2006 its share price (split-adjusted) soared from less than $2 to over $58 as it benefitted from surging demand for they type of music, video and electronics that could be found on its shelves. But digitization of music and video sent its share price into a steep descent to below $15 by December of 2012, due to mounting concern that online e-tailers such as Amazon and Apple iTunes would drive it out of business, since many of those items could just as easily be purchased electronically.

But Best Buy has battled back by overhauling its product mix. It’s greatly reduced its inventory of music and video while expanding its selection of household appliances, home theater equipment, smartphones and other items that are not as readily purchased online. The turnaround has taken a couple years to complete, but the company appears to have successfully transitioned into a profitable retailer that can survive in the era of Amazon.

With the critical holiday gift giving season rapidly approaching (only 72 more shopping days until Christmas!), analysts will be taking a close look at Best Buy’s next quarterly earnings report, due to be released the third week of November. Just as importantly, any guidance language will be parsed with a fine tooth comb for hints as to any changes in revenue or profitability trends.

I added Best Buy to the Personal Finance Growth Portfolio in March of 2015 due to its high IDEAL score at that time. Since then, its share price has dropped and recovered by more than 30%, but never did its IDEAL score waver. That tells me that BBY has not been trading on fundamentals for the past eighteen months, but rather the perception of its future prospects based on fear more than reality. And now that the perception of Best Buy has changed for the better, its days of lagging the stock market should be over.

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