Unconventional Thoughts On Best Buy

| About: Best Buy (BBY)
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From what I've read and heard in the financial press, there are three predominant thoughts concerning Best Buy (NYSE:BBY):

  1. There is a group of people who believe Best Buy is Amazon.com's (NASDAQ:AMZN) showroom.
  2. There are those who believe the recent sell-off represents a buying opportunity for long-term investors.
  3. Some investors believe Best Buy is destined to fail, eventually realizing the same fate as Circuit City. These investors think Best Buy is a long-term sell.

Here are my thoughts on all three:

Amazon.com is a powerful foe for brick-and-mortar retailers. But some of the advantages the company once had over Best Buy either no longer exist or are on their way out the door. For starters, it used to be the case that Amazon's low prices couldn't be found at Best Buy. Nowadays, however, that is not the case. Best Buy's "Low Price Guarantee" has changed the equation, matching pre-tax prices from Amazon, among others. Of course, because Amazon is known as a place to shop without being forced to pay sales tax, even if the price of a product on Amazon is matched by Best Buy, Amazon still wins the price battle because Best Buy collects sales tax. That, however, is changing. Amazon now collects sales tax in a number of states, and the trend is moving in the direction of more states, rather than fewer states, winning the sales-tax collection battle with Amazon.

With the pre-tax price match already in effect, once Amazon helps states enforce tax laws that are already on the books, the price advantage relative to Best Buy will disappear. At that point, consumers will be able to make the following choice: (1) Go to Best Buy and buy a product for the online price, see the product right before purchasing it, ask a sales representative any questions you may have, take it home immediately after purchasing it, and have an easier way to return the product than you would buying the same thing on Amazon.com. Or (2) purchase the product on Amazon.com for the same price you would get at Best Buy, wait a period of time before actually receiving the product, and have an inconvenient time returning the product, if need be.

As long as Best Buy does an effective job getting the word out about the advantages of shopping at a store rather than online, I think the company can stem some of the shift that's occurring from shopping in store to shopping online. Competitive prices, receiving the product immediately, a convenient method of returning products, and the ability to see the product and ask questions just prior to purchase are very real benefits of shopping at Best Buy as opposed to Amazon. Best Buy just needs to do a better job aggressively advertising those benefits to the public.

Conventional wisdom may dictate that Best Buy is Amazon's showroom. For me, that is no longer the case. Does that, however, mean long-term investors should take advantage of the recent drop in Best Buy's price and accumulate buy-and-hold positions? I don't think so. In my opinion, Best Buy's recently losing over one-third its market value was completely unwarranted. The disappointing holiday revenue results simply weren't as bad as one might assume based on the stock's performance. The reaction in the stock shows the shareholder base is not one that has a "buy-and-hold" mentality, and not one that makes Best Buy a suitable buy-and-hold candidate for investors with low-to-moderate risk profiles.

With that said, I do think Best Buy is a great candidate for trading. Over the past week, I have already successfully traded Best Buy twice from the long side, and the stock will continue to be high on my list of those with favorable trading characteristics. As a long-term investment, however, the recent price action tells me it is better to look for opportunities elsewhere. The kinds of shareholders Best Buy seems to be attracting is simply unacceptable.

Just because I don't think Best Buy is a suitable buy-and-hold candidate for most investors doesn't mean I think the stock is going to zero and the company is going bankrupt. I currently own Best Buy's March 15, 2021 maturing senior unsecured notes (CUSIP 086516AL5) and fully expect I will be able to hold those bonds to maturity, if I so choose.

From my perspective, the safest way to make money on Best Buy is not to put on a buy-and-hold position of any kind (long or short). Instead, I think it makes more sense to use short-term trades (for those so inclined) or to take the respectable 5.671% yield-to-maturity on Best Buy's 7-year bonds and simply collect the income.

In the near future, I will provide additional commentary on Best Buy's bonds.

Disclosure: I am long Best Buy CUSIP 086516AL5.