Analysis: Best Buy not a good buy to value investors

Thu Apr 19, 2012 3:04pm EDT
 

By Dhanya Skariachan

NEW YORK (Reuters) - In an ideal world, Best Buy (BBY.N: Quote) would be a value investor's dream come true. But in the real world of transparency and retailing twists and turns, it just isn't.

The retailer's stock has lost one-third of its value since touching a 52-week high of $32.85 in June. It has a healthy cash flow, and its shares trade at about six times forward earnings while the larger electronics sector trades at a multiple of 10 -- all traits that would normally attract value investors.

Instead, Best Buy's inability to fend off online rivals such as Amazon.com (AMZN.O: Quote), lack of strong leadership, and conflicts of interest in the boardroom are scaring investors away.

"I kind of view it as a value trap right now. I think most of my peers view it the same way," said Harry Rady, senior portfolio manager of San Diego-based Rady Asset Management. Rady said he would not buy Best Buy shares even if they fell further.

"I don't care how cheap it gets. Their business model is obsolete," Rady said, referring to how Best Buy has been reduced to a mere showroom for online retailers, with consumers going to Best Buy stores to check out electronics like high-definition televisions, then buying them elsewhere for less.

Other investors agreed.

"In a risk-off environment, I'd be scared to own Best Buy," private investor Daniel Yu said, adding that the current state of affairs at Best Buy made him compare it to Hewlett Packard (HPQ.N: Quote) and Research In Motion RIM.TO RIMM.O. Risk-off is the notion that when markets are down, stocks like Best Buy come under deeper selling pressure because it is seen as riskier.

HP's stock spiraled downward after CEO Mark Hurd departed over accusations of an improper relationship with a female contractor, and Research In Motion's deteriorating business pulled down its stock, Yu pointed out.   Continued...

 
The inside of a Best Buy store is seen in New York, March 26, 2012. REUTERS/Shannon Stapleton