Best Buy Now The Toast Of Wall Street. Last Year, It Was Just Toast

What a difference seven months make. Best Buy (NYSE:BBY), which was all but left for dead in December, is now enjoying widespread investor applause. One key Best Buy analyst, Gary Balter of Credit Suisse, issued a buy rating on the stock on Monday (July 1) in a note that said: "This story is about significant and transformational earnings growth, which we believe will materialize," according to a story in the Star-Tribune.

To put these changes into stock context: Best Buy shares closed Monday at $29.74. Back in December, the stock hovered around $12. The newspaper credited many of the good feelings to new CEO Hubert Joly's team's efforts to boost revenue and squeeze margins. "If there is one line to describe the change, it is that Best Buy is turning its store base from a cost liability to an offensive weapon," Balter wrote.

"The sell side is chasing their tails. Best Buy is a great story—until it's not," said one hedge fund manager who once owned Best Buy stock and is now shorting the shares because he believes Wall Street is way too optimistic.

Clearly, though, Best Buy is nowhere close to being out of financial danger. "Over the short term, however, Wall Street's newfound enthusiasm for the consumer electronics retailer might complicate Best Buy's fragile recovery if it can't meet such heightened expectations, some analysts caution," the Star Tribune story said. "The Richfield[, Minn.]-based company has yet to post consecutive quarters of increases in sales at stores open for at least a year. And it remains to be seen whether Best Buy can get those sales without sacrificing its profits as the company still faces formidable competition in Wal-Mart and Amazon."

Part of the situation is the cyclical—and maddening—nature of Wall Street. Having truly beaten down Best Buy for so long, the stock was legitimately under-valued, so the fact that the stock would rise under new leadership is not stunning. And, yes, the fact that Wall Street tends to overcompensate is not new, either. Wall Street typically sees major stocks as "horrible" or "magnificent" and it can switch between the two views on the same stock.

Best Buy is on an up note for the moment, but its biggest challenge is that it has yet to propose a way to address the fundamental issues. Consumer electronics is a category that online does very well. And the commodity nature of consumer electronics—other than Apple hardware—makes them attractive places for price wars. After all, there is no differentiation between what the same TV model from the same manufacturer at competing chains.

In short, how will Best Buy flip that? How will it make its in-store experience compelling? Can it turn around customer service? It's not how the store-within-a-store model—which Best Buy is now working with both Microsoft and Samsung—will flip things around. It can deliver short-term revenue boosts, which is great, but will it negate incursions from Amazon and Target long term?

For more:
- See this Star-Tribune story

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