The three companies that will be discussed include Hewlett-Packard Company (NYSE:HPQ), Best Buy Co., Inc. (NYSE:BBY), and Staples, Inc. (NASDAQ:SPLS).
The following is a chart showing the performance of the three stocks year-to-date compared to the S&P 500.
As the chart shows, these stocks have all outperformed the S&P 500 so far this year by a large margin.
What these stocks have in common
These three stocks have some things in common that have made them intriguing investments since last year and the beginning of this year.
Best Buy Co., Inc. (NYSE:BBY) and Hewlett-Packard Company (NYSE:HPQ) have both been in turnaround mode, with their share prices reaching 52-week lows toward the end of last year. The worries for Hewlett-Packard Company (NYSE:HPQ) at the time were that earnings were going to weaken and start to decline significantly, in addition to the Autonomy scandal. Best Buy was declining due to earnings worries. Best Buy had an offer to have the company taken private, although the bid was only $17 per share at the high end.
Staples, Inc. (NASDAQ:SPLS) was trading toward the low end of its 52-week range, partly due to the fact that the small business industry has not been growing well within the economic recovery. Earnings were also a concern. The company recently released its first-quarter results that also included an upbeat view for earnings for the rest of the year.
Additionally, Best Buy Co., Inc. (NYSE:BBY) and Staples have two things in common that I feel are significant to their future. Both have strong Internet websites and traffic to support them. This, I feel, provided some insight into why they were undervalued at the time and that they may still be undervalued.
Best Buy and Staples – Internet gems
Staples, Inc. (NASDAQ:SPLS) is the world’s second largest Internet retailer according to its website. Internet sales increased by about 5% in 2012 compared to 2011, with 2012 full year Internet sales coming in at $10.6 billion. This makes up about 40% of its total worldwide yearly sales. With Staples, Inc. (NASDAQ:SPLS) already having a strong physical storefront, it is a double threat. If consumers shift back to shopping in person more, it is in a strong position to capture those sales. If Internet sales continue to grow in favor, its online presence is very strong.
Best Buy Co., Inc. (NYSE:BBY) has a strong and growing online presence. The company already is well known for its physical big box store fronts, as its stock experienced many years of strong performance in the 1990s because of this. Black Friday saw Internet traffic increase by 60% year over year overall. Best Buy’s website moved up to become the third most visited site in the world on Black Friday in 2012.
Best Buy Co., Inc. (NYSE:BBY)’s fiscal fourth quarter is the most important quarter for the company, as the majority of its full year earnings come from here because of Black Friday, Cyber Monday, and holiday sales. Upon seeing how strong its web traffic was on Black Friday, and the preliminary indications showing that its in-store traffic was strong, this provided some evidence that the holiday season may have been going well.
Sure enough, its fiscal fourth-quarter earnings per share came in at $1.64, ahead of the $1.54 estimate. This helped to propel its share price. With its growing online presence, coupled with its strong physical stores, Best Buy is a force in the industry despite the stiff competition from Amazon.com, Inc. (NASDAQ:AMZN).
The turnaround is in place for HP
With former eBay CEO Meg Whitman now leading the charge as CEO for Hewlett-Packard Company (NYSE:HPQ), the company has successfully managed its turnaround so far. The company has beaten earnings estimates for the past four quarters reported, with earnings for the quarter that ended in January of 2013 coming in at $0.82 per share (ahead of the $0.71 per share estimate). Even better, the company is expected to grow its earnings by about 3% per year over the next five years. A year or so ago, the worry was that earnings were going to decline significantly. Earnings for 2013 are expected to come in at $3.49 per share.
In order for these turnaround efforts to continue, putting and end to the operating margin and revenue declines experienced in fiscal year 2012 is key. The company is focusing on cost reduction initiatives expected to last until 2014 along with increasing R&D and IT expenditures to become more competitive.
Cash on Hewlett-Packard Company (NYSE:HPQ)’s books has increased to $12.59 billion as of January 2013. Shareholders’ Equity has also increased to $23.29 billion. Hewlett-Packard Company (NYSE:HPQ) also increased its dividend in 2012. These factors prove to me that the company is earning solid money and strengthening its financial position. Based on the share price as of this writing, it is near a 52-week high. Some of the turnaround has already been priced in, though if it continues, I predict that there is still a lot of room for the shares to run.
Best Buy and Staples – Areas of success
Based on the 10-K filed for Best Buy for the most recent fiscal year ending in January of 2013, some key measures of strength are noticeable. Operating cash flow was $1.4 billion, with capital expenditures coming in at $705 million. This produced strong free cash flow. Cash on the balance sheet increased to $1.8 billion from $1.2 billion in January of 2012 as a result of this. Its net loss decreased by over 50% compared to January of 2012, and this net loss was due to goodwill impairments which is a non-cash expense.
While some big box retail stores of Best Buy Co., Inc. (NYSE:BBY) have been closed, its Mobile stand-alone stores are growing in number. It had 409 of these stores as of January 2013, compared to 305 a year before that. Computing and mobile phones made up the largest percentage of its revenue mix, and that grew by 10% in 2013 to 44% of total revenue.
While sales decreased for Staples, Inc. (NASDAQ:SPLS) in the first quarter ending in March of 2013 compared to the same period a year before, there were some strong areas of strength. Based on the 10-Q filed, cash flow provided by operations jumped to $348 million from $147 million a year ago. North American commercial sales were a bright spot as those sales increased 1.7% in March of 2013 compared to March of 2012. International sales declined 12.5% though, and this is an area that needs to improve as it would greatly help the company meet or exceed its earnings targets.
Staples, Inc. (NASDAQ:SPLS) is continuing to buy back shares through 2013, and as a result, this and the dividend are two large uses of its strong positive cash flows. These are great things that provide strong value to shareholders as I feel the shares are still undervalued. Management obviously agrees.
Conclusion
I like all three of these stocks for the long run, though at current price levels my view of them has been adjusted accordingly.
I was a shareholder in Best Buy Co., Inc. (NYSE:BBY) and Hewlett-Packard Company (NYSE:HPQ) but sold my positions to take profits once the shares increased as fast as they did from where I bought them. I like Best Buy at $20 per share and Hewlett-Packard at $18 a share for long-term entry points. The strong Internet presence that Best Buy has and the solid earnings that Hewlett-Packard produces are the things I like about those two stocks.
I own Staples, Inc. (NASDAQ:SPLS) here and have made a decision to hold on to my shares even though the recent increases in price have made it a more difficult decision. I feel the shares are in a range that can easily be broken to the upside if the company can grow its sales. As it is, the company was mentioned to be a takeover target of Bain Capital and has been noted to be appealing for the value it provides. I like it here at current price levels, and this would be a stock I would still buy here.
The article Can These Stocks Continue Their Run? originally appeared on Fool.com and is written by Anthony Parsons.
Anthony Parsons owns shares of Staples. The Motley Fool owns shares of Staples. Anthony is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
