Shares of Best Buy (BBY) fell more than 15% yesterday after the company reported its 3rd quarter results. It's pretty strange that a company can lose so much of its value on the basis of one quarter, as the company came up 4 cents short on analyst EPS estimates. But it's even more strange for a company like Best Buy, which makes most of its annual profits in the 4th quarter (as per the chart below), which means the 3rd quarter profit result doesn't tell you a whole lot about the business' long-term prospects:
On an annual basis, Best Buy has shown remarkably consistent returns on invested capital, as illustrated here.
So yesterday, it's likely that the company's price fell much more than did its value (if its value fell at all). Such divergences between price and value can give long-term investors the opportunity to profit.
After yesterday's price dive, Best Buy trades for just over $8 billion, even though it has a net cash position and earns about $1.3 billion annually. Furthermore, in just the last five years, Best Buy has returned $6 billion to shareholders through dividends and buybacks. Management has been clear that buybacks will continue as long as the share price remains depressed.
Best Buy's price is indeed volatile, as any 5-year price chart will show you. As shown by its returns on capital, however, Best Buy's value is remarkably stable. Long-term investors can profit by buying when pessimism reigns and selling when optimism returns.
Disclosure: Author has a long position in shares of BBY