BERKO: Best Buy is better as a sell
Friday, August 03, 2012 7:00 AM
Dear Mr. Berko:
In October 2011, I bought 250 shares of Best Buy at $26 on the recommendation of the Branch Banking & Trust Co. (BB&T) research department, and the shares have gone straight down from the get-go. I continued to ask my broker, and he continued to say that BB&T still has a “buy” on Best Buy. Now the shares are $19, and I’d appreciate your opinion. Should I average down, should I sell my shares and suck up a $2,000 loss, or should I continue to hold Best Buy? Is their Geek Squad still in business? I called several times and got placed on hold forever.
R.E., Durham, N.C.
Best Buy Co. Inc. (BBY-$18.07) is a $51 billion revenue retailer of TVs, mobile phones, digital cameras, camcorders, DVDs and Blu-rays, digital downloads, MP3 players, car stereos and a host of other electronic and technological gizmos. And yes, it has an outfit called the Geek Squad that’s still in business. But some folks have told me that those guys would rather smoke dope than answer the phone.
I discovered that your brokerage, BB&T, formerly Branch Banking and Trust, has had a “BUY” recommendation on Best Buy since May 2011 when it traded at $32. Between May 2011 and early May 2012, BBY shares steadily lost value, though BB&T’s highly regarded analysts continued to support the stock with a solid “BUY” rating. However, a dozen points later, in late May of this year, after the stock dipsy-doodled to $18, the highly retarded analysts at BB&T agreed it was time to be more aggressive and placed a “HOLD” on BBY shares. A “HOLD”? Great gobbledygook, what kind of pussyfooting is “HOLD”? Where were BB&T’s highly retarded analysts as BBY bared its breast to the public that warehouse clubs, online retailers and consumer product OEMs were hurting revenues and margins? Where were those highly retarded analysts when BBY admitted that sales in entertainment software were shrinking, that replacements will be slower-moving and that lower-margin categories were leeching store productivity? And BB&T’s highly retarded analysts should also have known that BBY would not be able to compete with cable providers, iTunes and other platforms for market share for direct-to-consumer media content distribution. Oh well, it’s a good thing that few investors depend upon BB&T’s research to guide their thinking.
I’d be a seller of this big-box store. I don’t like the shopping experience at big-box stores, where customers need tracking devices to find sales help. I don’t like the shopping experience at big-box stores, where the help is usually a half bubble off plumb and considers customers to be an inconvenience. And I don’t like big-box stores, where the salespeople have no financial incentives for achieving goals or customer satisfaction. I think others agree and suspect we may be watching the demise of the big-box store as a retail concept. And now it seems that BBY’s growth may have it a wall. Revenues have been as flat as a pancake and seem to have peaked at $50 billion in 2009. Revenues for the forward five years may grow about 1.5 percent annually, but only if BBY continues to open new stores. Blame it on the competition, blame it on falling consumer incomes or blame it on just product saturation. Several investment services expect BBY’s net profit margins and earnings to continue falling. However, though share income may increase, be aware that BBY, since 2004, has steadily reduced its shares outstanding from 495 million to an expected 285 million by 2017. The stock could have a bounce to the low $20s. but be a seller and find another brokerage.
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