Best Buy: This Season's Top Retail Stock?

by: Ockham Research

“I think it’s Best Buy (NYSE:BBY), for all you home gamers. It reports December 15th and I think it will deliver, yes, indeed… We went to a local Best Buy, under cover, of course, and found that…They have 47 different sets of flat panel TVs, versus 11 at Walmart. Average price, $957, cheaper than Walmart (NYSE:WMT). This best buy beat Walmart on price. Hallelujah! Best Buy had great Black Friday traffic. The crowds were quote, materially bigger than last year.

I don’t think it’s expensive. With a 12.4% growth rate at this point, it’s cheaper than target and Kohl’s (NYSE:KSS) and JC Penny (NYSE:JCP). The consumer wants gadgets. Best Buy has the devices in demand in holiday season and Best Buy has the devices in demand in holiday season.”– CNBC’s Mad Money 12/2/2009

On Wednesday night’s Mad Money, Jim Cramer reiterated his stance that this is one of the most despised bull markets in history as investors just refuse to believe in the prolonged rally of the past 9 months. His belief in the continuing bull market relies on the consumer coming up big this season and outpacing the analysts' expectations. If that is the case, there are some seriously attractive stocks in the retail sector and last night’s show revolved around two of Cramer’s favorites (NASDAQ:AMZN) and Best Buy. We will focus our attention on Best Buy in this post, as Cramer’s love for Amazon has been well documented already.BBY

Consumers want the latest gadgets this season and they saw bigger crowds for their Black Friday deals than last year, which will help them better manage their inventory coming into the holiday season. Cell phones from the likes of Nokia (NYSE:NOK) and Apple (NASDAQ:AAPL) could very well be hot gifts again this season. The iPhone was recently made available at Best Buy and could draw more customers into their stores. Also, as you can see from Cramer’s quote above, he was pleased to see the selection and prices of their flat screen televisions.

In his piece last night, Cramer was advising investors to buy the stock ahead of earnings later this month because he expects the company to beat. However, from a longer term view that we have at Ockham, the stock appears to be Fairly Valued. Among our reasons for this rating is the fact that the stock is trading right around the low end of its historically normal valuation ranges of price-to-cash earnings and price-to-sales.

We can see why Cramer is excited about this holiday season at Best Buy, but so much of that has already been reflected in the price, as it has more than doubled from this point last year. Market share gains from the collapse of Circuit City has made Best Buy more attractive as well, yet with the stock hitting a new 52-week high this morning off of the “Cramer Bounce” the valuation is not exactly pricey but it is certainly not the most attractive stock in the retail space.

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