Really the Best Buy

By: Dennis Biray
Submitted: 2007-01-17 16:17:39
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As the holiday shopping season is days upon us, investors are trying to locate the perfect gift for themselves in the form of rewarding shares. With the launch of the next generation of video games upon us as well as the continued advancements in technology for the consumer, there may be no better stock to invest some capital in than Best Buy (BBY). However as the economy is not in a stable position, and could be turning for the worst in terms of growth, how long should you hold on to this near perfect equity?

To first bring in the fundamentals, Best Buy really uses its name with conviction not only for its products but for its shares as well. Supporting tremendous growth percentage wise in terms of margins relative to revenue and operating income, while much can be attributed to strong economic growth, such deduction does not deviate from the fact that Best Buy is an excellently managed and run company. Producing more total assets than liabilities year over year, Best Buy, with a P/E ratio of near 22, is impressive compared to rivals such as Circuit City who’s own P/E is hovering near 26. Granted, the difference may be marginal and there is a good chance that Circuit City will produce figures similar to Best Buy, the real comparison is that over the last six months, Best Buy has increased about 20% higher in terms of share price, sustaining a lower P/E ratio while Circuit City has been floating around 17 trying to keep even. While such a short term analysis may not provide the best scrutiny, as over the last five years both companies have done fairly well in terms of making investors happy, I feel that Best Buy with the strong P/E and stronger fundamentals should produce happier investors relative to its rival.

Now, you may be wondering why I expect Best Buy to produce incredible holiday season sales. As recently reported, the unemployment rate, currently at 4.4%, remains at one of the lowest levels of all time. What that means for shareholders of Best Buy can be examined by the consumers who are obtaining these jobs. As the labor force increases, more consumers are going to be granted employment which will result in a higher overall domestic income for America. Since most Americans utilize a process of a negative savings rate, there is a good chance, relative to most years, consumption of luxury goods such as video games or computers will increase in large margins especially during this holiday season. What that means is that margins will dramatically increase in the short run for the next few quarters, and if you are to buy shares of this stock now and sell it before the March earning results poor in, you should see a healthy profit in your portfolio. This is especially true with the video game launches of Wii and PS3 which should have a tremendous impact as the Gamecube and Xbox did five years ago sprouting the share price of Best Buy 250% in less than a year. However, as such an favorable economic foundation remains strong now, because there is still slowing down in many parts of the overall economy, such growth should not sustain all of next year, and it would not be wise to hold on to this company if a strong recession hits.

Nevertheless, if you feel the urge to keep your shares, Best Buy, besides one instance (which was the result of a split), has done fairly well during times of economic slowdown. So while I wouldn’t advise it, if you must, holding on to your shares as a long term investment would not be that terrible to forgone profits.

Thus with the holiday shopping season approaching rapidly, as an investor, the best buy of the season would be Best Buy shares. With a fantastic fundamentals, a fairly stronger presence over its competitors, and a currently favorable economic situation to feed upon, I would not be hesitant to take a short term risk in locating some luck with Best Buy. However, as the economy is always rapidly changing, and as the happy Christmas season turns into a dreaded long winter, I would start to be a bit wary about owning shares of this company past the spring months of 2007, especially if the recession turns to be a hard landing.

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