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Stovall and Schaeffer Pick a "Best Buy"

09/05/2003 12:00 am EST


Sam Stovall

Chief Investment Strategist, CFRA Research

In Sam Stovall’s Sector Watch –a feature of S&P’s The Outlook Online –the analyst focuses on consumer electronics stocks, and selects Best Buy as the top pick in the group. Bernie Schaeffer also picks Best Buy as his latest featured stock. Here are their comments.

Two events over the past month caused Sam Stovall to take notice of Best Buy (BBY NYSE). First, he notes, "On August 6, Amrit Tewary, S&P's consumer electronics analyst, upgraded his investment opinion on Best Buy to 5 STARS (buy) from 4 STARS (accumulate). The reason? Tewary believed that the retailer's recent share-price weakness offered an attractive buying opportunity. He sees it as the group's best-positioned retailer, and it's undervalued." Stovall continues, "After taking note of the upgrade, I then saw that the S&P Computer & Electronics Retail index became the newest member of the Industry Momentum portfoliothe list of industries with top S&P relative strength rankingsand decided this could be a story worth telling."

S&P's The Outlook adds, "We see Best Buy posting 14% higher sales from continuing operations in fiscal 2004 (ending February). We forecast operating earnings of $2.45 per share in fiscal 2004 vs. $1.91 in fiscal 2003. With a P/E multiple of 20 times our fiscal 2004 operating earnings estimate, the stock sells at a premium to the S&P 500 but at a discount to its average historical multiple of 23. We believe the P/E multiple will rise to historical norms, in light of the company’s above-average growth prospects and strong market position. Our 12-month target price of $64 per share is derived by applying the historical multiple to our earnings estimate of $2.78 for fiscal 2005"

Best Buy is also the latest featured stock from Bernie Schaeffer. "In early August, BBY raised its second-quarter and full-year earnings guidance above the Street forecast due to strong same-store sales and cost controls. On the technical front, the stock has outperformed the S&P 500 Index since early November. Despite BBY's solid technical and fundamental backdrop, sentiment continues to sit near bearish extremes. Additionally, the number of BBY shares sold short is 3.6 times its average daily trading volume. This could potentially fuel a covering rally, boosting the shares higher. Finally, Wall Street maintains a neutral bias, as 12 of the 24 analysts rate it a 'hold'. Any future upgrades could lift BBY higher. Traders should target a move up to 60.19 with a stop-loss set for a trade below 49.72."

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