Retail

  • 12 Jun
    Why Best Buy (BBY) is more like a “bust buy” right now for investors

    Why Best Buy (BBY) is more like a “bust buy” right now for investors

    We all love seeing stocks go up. When a stock’s upward trend lasts for several months, a year, or more, that movement usually translates to big-profit, “home run” trades for those who had the sense to jump in early. BBY is a great example of exactly that kind of trade. It’s a stock that, as of this writing is trading only a few dollars per share away from its all-time high and has more than doubled in price over the last two years. If you weren’t one of those fortunate few who saw the opportunity to get in two years ago, but you saw the strength of the stock’s long-term trend, you’d probably be tempted to consider buying in. The question is, how much opportunity is left, and how much risk do you have be willing to accept for whatever upside remains? Let’s take a look.

    Fundamental and Value Profile

    Best Buy Co., Inc. is a provider of technology products, services and solutions. The Company offers products and services to the customers visiting its stores, engaging with Geek Squad agents, or using its Websites or mobile applications. It has operations in the United States, Canada and Mexico. The Company operates through two segments: Domestic and International. The Domestic segment consists of the operations in all states, districts and territories of the United States, under various brand names, including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, and Pacific Kitchen and Home. The International segment consists of all operations in Canada and Mexico under the brand names, Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad. As of December 31, 2016, the Company operated 1,200 large-format and 400 small-format stores throughout its Domestic and International segments. BBY’s market cap is $20.6 billion.



    • Earnings and Sales Growth: Over the last twelve months, earnings decreased by about 36%, while sales grew modestly. It’s generally difficult for a company to grow earnings faster than sales, and in the long term can’t be expected to continue, but it is also a positive sign of management’s ability to maximize their business operations.
    • Free Cash Flow: Free Cash Flow has declined since the first quarter of 2017 but remains healthy at more than $1.3 billion over the past twelve months.
    • Debt to Equity: the company’s debt to equity ratio is .23, a very low number that is very positive, especially when the norm for the industry is about three times higher. While operating profits are more than adequate to service debt, their total cash and liquid assets also exceed their total long-term debt by more than 4x.
    • Dividend: BBY pays an annual dividend of $1.80 per share, which translates to an annual yield of 2.43% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BBY is $12.13 per share. This number has declined in every quarter from a peak at around 15 at the beginning of 2017. At the stock’s current price, that translates to a Price/Book Ratio of 6.09. The industry average is higher, at a little over 12, but their historical average is only 2.9, which means the stock is trading twice as high as it has historically done from a valuation standpoint. At par with that historical average, the stock’s price would be only $35, which I think underscores the kind of risk investors who want to jump in now could be exposed to.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action: Over the last week or so, BBY rallied strongly off of support at around $69 per share. The stock’s all-time highs were reached a little below $80 just last month, followed by a rapid sell off that drove the stock down to its latest pivot low. It is showing strong momentum at the moment as it fills the gap that came when the stock dropped from a bit above $75 to below $71 on an overnight basis late last month. That momentum is likely to be tested between $75 and $76.
    • Trends and Pivots: I’ve drawn two diagonal lines to illustrate the shift in the stock’s intermediate trend. The blue dotted line represents the trend up to the stock’s mid-May drop. Before that point, the trend provided good support that helped the stock rally to its January high and even establish a new all-time high price at nearly $80 per share; however the stock’s drop at the end of the month below that line, with new pivot low support at around $69, forced a redraw of that trend, illustrated by the dotted green line. The more gradual angle of that line implies a weakening of the intermediate trend, and a break below that support point would mark a major trend reversal that should see the stock drop to at least $62 before finding new support. The horizontal orange line at around $75 indicates where I think the stock is likely to find its next resistance point, and the red horizontal line is near the stock’s all-time highs. In order to extend the stock’s long-term trend further, it would need to break this level. For the time being, this is also where I believe the stock’s maximum foreseeable upside is. That puts the potential upside right now at $7, with downside at $11. That’s a reward: risk ratio of .63:1; smart traders and investors look for this ratio to be 2.5 or 3:1 at minimum.
    • Near-term Keys: Watch the stock’s movement carefully. If the stock manages to push above $80, it would establish new all-time highs and force a complete reevaluation of the reward: risk profile I just outlined. On the other hand, a break below $69 – which I believe is more likely – would see the stock drop as low as $62 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.


    By Thomas Moore Investiv Daily Retail
  • 16 Nov
    These Two Chinese Retail Giants Could Deliver HUGE Returns

    These Two Chinese Retail Giants Could Deliver HUGE Returns

    • I’ve created simple models that estimate future earnings and stock price potential for two of China’s biggest retailers, JD.com and Alibaba.
    • In addition to their potential, we’ll also discuss their risks.
    • I recommend checking out yesterday’s article about the Chinese e-commerce market before jumping into today’s.



    Introduction

    Yesterday we discussed the Chinese retail environment and discussed what to look for when searching for a good investment.

    Today, I’ll dig deeper into specific investments in order to apply my theory. I’ll dig into the biggest Chinese e-commerce players, look at what the real value they offer is at current prices, and look at the risks and rewards at this point in time. More →

  • 15 Nov
    Want To Invest In The Next Amazon? Look To China

    Want To Invest In The Next Amazon? Look To China

    • The Chinese e-commerce environment has been booming and is expected to continue to do so.
    • I’ll describe the most important trends to look for in potential investments.
    • It’s highly likely that a rising tide will raise many boats, but run when it shifts.



    Introduction

    E-commerce has been developing the world over in the past 20 years, and the clear winner in the game has been Amazon (NASDAQ: AMZN). AMZN’s stock performance has also been stellar. More →

    By Sven Carlin China Investiv Daily Retail
  • 30 Oct
    They May Be Cheap, But Don’t Buy Retail Stocks Now – Here’s Why

    They May Be Cheap, But Don’t Buy Retail Stocks Now – Here’s Why

    • Don’t look at past figures and expect them to suddenly reappear. Retail is a tough business with tight margins.
    • Retailers have experienced a margin decline recently. But there’s still plenty of room for them to fall further and the situation may get really ugly.
    • Some will win, but who can identify the winners now?



    Introduction

    Retail stocks keep getting cheaper and cheaper, and many investors look at current valuations and think they are too cheap to be true. In today’s article, we’ll dig into the sector, see if there is value, or if the “too cheap to be true” retailers are all just Potemkin’s villages.

    Before digging into specifics, I want to share a retail example from my neighborhood. More →

  • 13 Aug
    Sunday Edition: Wearing A Polo? You’ll Like This Buying Opportunity

    Sunday Edition: Wearing A Polo? You’ll Like This Buying Opportunity

    When reading about the fraught retail sector, I usually find myself wondering about how iconic American brands are doing. Those longstanding brands that really embody and define American style.

    This week had me thinking about Ralph Lauren (NYSE: RL).

    For several years, it has seemed that Ralph Lauren has been in the same boat with Michael Kors and Coach, with their products being found mostly at outlet malls and on discount racks at departments stores. More →

  • 03 May
    Think Only Brick & Mortar Retail Is In Trouble? Think Again.

    Think Only Brick & Mortar Retail Is In Trouble? Think Again.

    • The number of bankruptcies in retail is increasing and the probability of new bankruptcies is still high.
    • In the online environment, the competition is intensifying their efforts precisely at the moment when Amazon has finally reached some kind of profitability.
    • Price wars could make the whole online growth story a bad experience for investors. We’ll use Wayfair as an example.

    Introduction

    We’re seeing significant structural shifts in the retail environment where companies that were once considered blue chips are slowly going bankrupt, think Sears Holdings (NASDAQ: SHLD), while online retailer Amazon (NASDAQ: AMZN) is crushing it.

    The question many ask is: are retailers cheap now and online retailers expensive, or is it the other way around? To answer this question, it’s extremely important to look at how the competition in the online space will affect margins. We’ll look at some situations and try to come to the best option for your portfolio. More →

    By Sven Carlin Amazon Investiv Daily Retail
  • 01 May
    What You Can Learn From Under Armour

    What You Can Learn From Under Armour

    • There’s a divergence between Under Armour’s fundamentals and its stock price.
    • Every growth story is bound to end or at least slow down at some point, and at that point the stock usually gets hammered.
    • However, sentiment must not be underestimated as an $0.03 earnings beat can send the stock up 10%.

    Crazy Stock Movement

    Under Armour’s (NYSE: UAA, UA) stock has had a wild ride in the last four years. It went from $12 in 2013 to highs above $50 in 2015 only to fall to the current lows around $19. More →

  • 16 Apr
    Sunday Edition: Would John Templeton Buy This Sector?

    Sunday Edition: Would John Templeton Buy This Sector?

    When a market is as overvalued as the S&P 500, it’s best to be defensive, rather than being 100% invested, trying to eek out every last drop of potential gain.

    I don’t care if the market moves another 10% or even 15% higher based on momentum.  When you compare the potential for another 5% to 15% upside against the risk of a 50% or greater crash, it seems like a foolish move to me.

    At the top of a business cycle (we are there now), the most successful investors will typically hold much larger than normal cash balances and only commit new money to sectors which are truly undervalued – and trading at a point of maximum pessimism with a nice margin of safety. More →

  • 21 Mar
    When It Comes To Retail, Forget Buy & Hold – Buy The Trend

    When It Comes To Retail, Forget Buy & Hold – Buy The Trend

    • Retail is a dangerous business as there is always a new player on the block.
    • Traditional retailers see declining sales and margins while E-commerce retailers see growing sales and declining margins. This is not a good combo for investors.
    • As always, there will be many opportunities to make money, but be sure to know what you’re doing and forget about moats and long term buy and hold investments.

    Introduction

    In Buffett’s biography, The Snowball, retail is described as a marathon business where you have a new, fresh runner joining the race at every mile.

    One of Buffett’s first retail investments was a holding company, Diversified Retailing Company Inc. (DRC), formed by Buffett, Munger, and Gottesman in 1966 with the goal of acquiring retail businesses. Their first acquisition was Hochschild-Kohn, which on paper looked like a great buy due to its substantial discount from book value, good management, unrecorded real estate values, and a significant LIFO cushion. Despite the good fundamentals, they sold three years later at no profit. Selling without losing money might not seem all that bad to you, but it’s a terrible thing for Buffett because it means he has missed opportunities to better allocate capital. More →

  • 17 Jan
    Is Retail Really Uninvestible? Sven Doesn’t Think So

    Is Retail Really Uninvestible? Sven Doesn’t Think So

    • As some analysts categorize retail as uninvestable, it’s time to look for bargain investment opportunities.
    • Sales are shifting to e-commerce, but earnings are what are going to determine your investment results.
    • The combination of brick and mortar and e-commerce might be the investment winner as it gives you fundamentals and growth.

    Introduction

    A Wells Fargo analyst, Ike Boruchow, recently called the retail sector “uninvestable,” at least in the short term. He based his statement on changing consumer dynamics that compress valuations, the favorable weather, easy comparisons to 2015 which have made retail look ok, and the 25 companies that have cut their guidance in the last two weeks.

    I’m attracted by such statements because the best investments are usually found where all others have given up. Especially when a whole sector is surrounded by negative sentiment, even prices of good companies decline and create amazing long term opportunities.

    In today’s article, we’ll analyze how the retail sector is priced in relation to its long-term fundamentals. More →

    By Sven Carlin Investiv Daily Retail
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