Thursday, October 17, 2013

Best Buy Lives Up To Its Name

One of the toughest (from a psychological perspective) companies I've ever owned is Best Buy. Until recently, that is: the shares are up 250% year to date. While the ending is happy (I'm now out of it), the journey had more than its share of downs, for several reasons.

When the stock was getting hammered, the media loved to hate the company. Perhaps because Best Buy is a large cap, the negative headlines were almost daily for a while there. Some of you piled on, sending me messages about how there's no room for such retailers in today's world.

Though I'm a contrarian, I have to admit that the negativity did take its toll. I started to question my logic. Luckily, I stuck with it, as per this post from last year. A major reason I was able to stick to my convictions was that I felt that I had seen this movie before; during the tech bubble, any struggling bricks and mortar was considered to be on the verge of bankruptcy.

Indeed, the media coverage of Best Buy kind of reminded me of what articles were like in 1999. A quick Google search reveals a ton of articles from 2012 discussing Best Buy's impending bankruptcy, even though the company was free cash flow positive on the order a few hundred million dollars. (Interestingly, there appear to be practically no 2013 articles about Best Buy's bankruptcy, even though the company has hardly changed!)

We normally think of operating results driving sentiment, but in some cases there appears to be some reflexivity, in that sentiment can have an effect on a company's operations. Luckily for me, Best Buy being a mostly transactional business, I'm not sure that happened here. (I don't think I would say the same for Blackberry, where media negativity has likely caused some customers to switch to competitors.)

So what's the lesson here? I don't think it's to stick to your convictions, because I very easily could have been wrong here, as I have been in many other cases. I think the lesson is to recognize how difficult it is to predict the future. As such, one should buy cheap, so that one is always well-compensated for taking these risks.

Disclosure: No position

5 comments:

Anonymous said...

Nice work Saj.

I contemplated Best Buy after reading your posts, but sadly could not wrap my mind around its future prospects. In retrospect, that's when my analysis should have placed more emphasis on its heavily discounted valuation.

In resisting widespread pessimism, I went through a similar journey with Facebook (now up about 170% from its 52 week low). No doubt, more of a Fisher growth stock and definitely not a Graham investment! Nonetheless, my analysis and contrarianism led me to a different conclusion than Mr. Market's, much like yours with Best Buy, and so far it has turned out very well.

Interestingly, Best Buy's more impressive share price recovery is a reminder that market pessimism seems to drive down old economy stock prices much more than new ones, when in fact their long track records and management depth, among other things, might suggest the opposite is more appropriate.

A few questions:

1) Did you have a prescribed method for scaling up your purchases as the stock price dropped, such as buying progressively more shares as the price sunk past particular percentage thresholds?

2) Beyond an improving macro-environment, were their any company specific catalysts that came to fruition with Best Buy?

3) Does Best Buy offer any insights into or contrasts with your analysis of Staples or other retailers?

I'm trying to sharpen my thinking around the items mentioned and your contributions would be helpful.

As always,
Big Fan

Anonymous said...

I'm getting tired of these "pat on the back" posts when any monkey could throw darts at a few dozen stocks and dance on 400% returns for a given gamble.

The only thing that matters is your relative long-term record net taxes/fees to the investor whose alternative is to dollar cost avg into the S&P 500 over a lifetime and pay one lump-sum tax at the end of an investing lifetime.

The only way this "1000 orangutans flip coins and 500 orangutans make blog posts on how they called Heads right" approach makes sense is in the context of your cumulative record.

Anonymous said...

Replying to the Anonymous poster at 9:45am...

The author of this site posts his investing record on a regular basis. He also has a section on his website called "Value Fail" that discusses some of his not-so-greatest-hits. So basically he has already been doing what you claim to want. It would have taken about 30 seconds of skimming through this website to realize that but you, foolishly, decided to skip this and bash the author, giving all of us anonymous Internet posters a bad name in the process.

Anonymous said...

Rather than Staples, perhaps a better comparison would be Radioshack, as its share price has not recovered to even 2011 levels. It would be great to see a follow up on your original Radioshack analysis, perhaps as a separate post. Just a thought.

Cheers,
BF

Saj Karsan said...

Hi BF,

Congrats on your FB investment. I thought about it as well when market sentiment was so negative, but it just doesn't fit into my investing niche...I couldn't put any value on it with any confidence.

1) Yes I do have a method for buying more as the price falls.
2) A number of operational changes were implemented by a new manager. The result of some of these that probably resonated the most with the market is that same-store sales declines have been stemmed.
3) I continue to own (and have added to) RadioShack as it took a big hit to its price.

I don't have anything new to add about RSH. I continue to believe it operates in an industry with barriers to entry and with a business model that should allow it to test and scale processes that increase profits. As such, I think the stock offers an asymmetric return here. I have no idea if it'll work out in the end though!