When a retail company like Circuit City (CC) announces their impending bankruptcy, it seems logical to look at the other companies in the same industry for investment or trading opportunities. Will Circuit City customers now flock to Best Buy (BBY) to purchase their electronic products? Even if they do, will investor sentiment and confidence in the U.S. economy and markets create an environment that creates a positive turn for Best Buy (BBY)?
Best Buy, a consumer electronics retailer, has shown excellent growth over the past ten years. Using a fundamental analysis that has proven itself successful over the last several years, Best Buy would be a BUY under $45.00 for a long term investor (5 to 10 year holding). As this is written, BBY is trading close to $24.00 with an EPS growth rate of better than 19%. If this analysis would have been done five months ago, I would definitely recommend Best Buy as a Buy.
Unfortunately, because of the current economy and stock market sentiment, it is very difficult to recommend any stock purchase. Stocks are not trading on fundamental or technical analysis. In addition to the stock market volatility, retailers are not expected to do very well during 2009. The stock market is currently trading on news and emotion, none of it being very good lately. For long term investors it becomes a matter of deciding when the best entry point is, and then begin to purchase the stocks using dollar cost averaging. Right now, it is still difficult to find entry points of any equity and is still a matter of speculation and opinion.
On a positive note Best Buy pays a good dividend, currently at 2.33%. They are the industry leader in electronic sales, boasting a quarterly revenue growth rate of 15.8%, second only to Rex Stores (RSC) with a quarterly growth rate of 19.2%. Fortune magazine called Best Buy one of their “Most Admired Companies”, that Best Buy was not only a “strong economic performer” but also “attractively priced”. They recommended Best Buy as a BUY.
Purchasing devalued stocks is a good investment strategy to use during a time that the markets are beaten down so severely. You must however have the time (and fortitude) to continue to hold, and even dollar cost average down (buy more as the stock price continues to fall), for an undetermined length of time. This was a strategy used by several, now billionaires, in the thirties.
As a potential investor in an electronics retailer (or any other industry affected by consumer spending) it really comes down to two things. Whether or not you see consumers utilizing their services and buying their products during a year of record breaking unemployment and the impending inflation predicted to start rising in the next few months and whether or not you believe that overall investor sentiment will eventually change for the better. With so many uncertainties still looming regarding economic recovery, investing in any equity will be filled with speculation and hope.