The sheer volume of articles written about various stocks each and every day almost guarantees that a significant portion of that writing will be complete and utter nonsense. Common offenses include cherry-picking numbers, making arguments that even a fourth grader could see through with ease, and showing a plot of the stock price and claiming it proves something.
Best Buy Co., Inc. (NYSE:BBY) is a good example of a stock which people love to bash. I recently stumbled upon this article that claims that Best Buy stock is poised for an “accelerated free fall.” The author makes a series of arguments which I will go through one by one.
1) Best Buy Co., Inc. (NYSE:BBY) is losing money
The article claims that Best Buy Co., Inc. (NYSE:BBY) is losing money, with a negative profit margin of -0.45% and a negative return on equity of -7.29%.
Best Buy Co., Inc. (NYSE:BBY) is not losing money.
The net income is negative due to a massive goodwill impairment and some restructuring charges. The free cash flow, which tells you how much money Best Buy Co., Inc. (NYSE:BBY) actually made during the year, sat at $965 million. Even better, in a previous article I wrote about Best Buy Co., Inc. (NYSE:BBY) I calculated owner earnings to be around $1.4 billion. Return on equity, then, is either 26% or 37%, depending on which number you use. The net income matters only to the IRS, as it is an accounting number and not indicative of the actual profit.
2) The buyout deal failed
The author suggests that most of Best Buy Co., Inc. (NYSE:BBY)’s stock gains were a result of the buyout deal proposed by Richard Schulze. This is demonstratively untrue. The Best Buy buyout saga ended on Mar. 1, and on that day the stock closed at $17.16. At that point the stock was up from its low in December of about $12 by 43%. Since the buyout deal collapsed the stock is up another 29%. Why would the stock continue to rise after the deal was dead if the deal was the only thing propping up the stock? Well, because it wasn’t.
3) The competition is too strong
Best Buy does face serious competition, with Amazon.com, Inc. (NASDAQ:AMZN) arguably the largest threat. For a long time Amazon had an automatic price advantage because it avoided charging sales tax, but this is now changing in many states. Along with this development Best Buy recently implemented a price-matching policy, completely eradicating any price advantage that Amazon has.
There are always going to be people who like to buy things in stores, who like to see and test out electronics before they buy it, who like to have knowledgeable staff guide them through their purchase. Although Best Buy employees have been criticized in the past, the company is now focused on training their employees to offer the best customer service possible. And with the “showrooming” effect minimized due to the price-matching policy, Best Buy has taken away much of Amazon’s advantages.
Ironically, while the author calls Best Buy’s margins and ROE abysmal there is no talk of Amazon’s numbers. Based on free cash flow Amazon’s ROE is 4.8%, and its free cash flow margin is 0.65%. This is truly abysmal.
4) The stock has gone up a lot, and summer is around the corner
Citing the whole “sell in May and go away” philosophy the author claims that Best Buy is likely to fall hard because it has risen much more than the market. First, past stock performance has nothing to do with future stock performance. Second, before this rise the stock had declined by about 50% over about a year, and by even more over a few years time.
The article also points to a chart of the stock price over 3 days which shows a downtrend, drawing the conclusion that this somehow proves that the massive decline has already begun. If you try to draw any conclusion from a chart then you probably shouldn’t be managing your own money.
The bottom line
I have no idea what the stock price is going to do in the short term, but Best Buy is certainly worth more than the $12 per share which the author of the original article suggests.
The article The Flawed Logic of Best Buy Bears originally appeared on Fool.com and is written by Timothy Green.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
