Following Best Buy's (BBY) most recent run-up after the deal with Samsung (GM:SSNLF) to open "Samsung Experience Shops" within Best Buy's large format stores was announced earlier this month, the overwhelming majority of market opinion-makers, message board participants, Twitter correspondents and web-based financial contributors have recommended adapting a short position in BBY.
The key rationale remains BBY's leading performance in 2013, an increase of over 100% since the beginning of the year. 'Unsustainable and ready for a pullback' is the short thesis du jour.
If we invested in a vacuum.
But we all know that past price movements do not portend future price performance. Instead, changes in stock prices are event driven. Earnings, company announcements, changes in institutional ownership, rating changes, consumer/sales trends, etc. dictate the direction of stock price movement.
Just look at BBY circa November 2010. The stock was around $45 then. By November 2012, BBY had lost ~75% of its value and traded to $11.40.
However, within that time period, there were numerous instances where someone could have said that the stock was oversold and ready for an upswing. And if they were lucky to time it correctly, they could have earned a nice little profit bucking the trend had they bought, then sold in these periods:
* August 2011 low of $23.25 to September 2011 high of $26.10, +12% return
* October 2011 low of $21.79 to November 2011 high of $28.42, +30% return
* December 2011 low of $22.48 to January 2012 high of $25.99, +16% return
* February 2012 low of $23.76 to March 2012 high of $27.95, +18% return
But - specific periods of volatility notwithstanding - the overall downward trend, that began in late 2010, remained intact through December 2012 driven largely by two key events.
One, the stock was being re-priced due to declining GAAP earnings:
* FY2010 = $1.82
* FY2011 = $1.62
* FY2012 = -$3.36
Source: Best Buy financials
Beginning in January 2013, however, a number of announcements not only dispelled any notion of bankruptcy but highlighted progress on a viable turnaround strategy that rewarded Best Buy with an increasing stock price:
* March 1-20, 2013: Multiple rating upgrades following strong FY2013 results --- stock up to ~$23 from ~$17
* April 4, 2013: Samsung partnership -- stock up to ~$26 from ~$23
Notice that this stock is event driven and will continue to react positively to company announcements related to its turnaround strategy until - I believe - it reaches fair valuation.
BBY currently trades at 4.0x EBITDA, compared to:
Source: Yahoo! Finance
...even at a reasonable 5.5x EBITDA multiple, the warranted share price would be over $32.
How does BBY get there?
First, earnings need to increase and according to consensus estimates BBY's earnings are expected to rise through FY2015:
* FY2014 consensus estimate of $2.18, up 33% from FY2013
* FY2015 consensus estimate of $2.38, up 9% from FY2014
Second, management needs to continue to execute on its turnaround plan. Additional announcements pertaining to progress on this front will be positive for this event-driven stock.
In my opinion, with a short position, you're betting that none of the following will occur:
* Additional partnership announcements. Take your pick...Google (GOOG), Sony (SNE), Microsoft (MSFT), LG or even ones with appliance manufacturers to reflect the buoyant housing recovery.
* Stronger than expected 1Q2014 results. Remember, though 1Q is expected to be challenging, consensus estimates have come down significantly from $0.46 to $0.25 to account for the weakness in sales.
* Announcements relating to additional store closings domestically and perhaps internationally.
* Additional cost cutting initiatives.
* Inevitable sale of all or parts of its foreign operations that contributed to -6.6% same store sales in 4Q2013.
...at a company that remains very attractively priced relative to its peers.
Sometimes it may be best to invest in companies and not trade stocks.