Best Buy is still a Great Buy

12/11/2013 7:00 am EST

Focus: STOCKS

Tyler Laundon

Editor, Cabot Small-Cap Confidential

Despite short-term concerns, this consumer electronics retailer remains on track for a longer-term turnaround, explains growth stock specialist Tyler Laundon, editor of 100% Letter.

Best Buy (BBY) fell 11% after reporting its latest earnings, but in context of the big picture, I'm not concerned about the price action.

Best Buy is in the beginnings of a massive turnaround/rebranding effort. The company went from great to awful. Now it's mediocre, but on its way back to great (in my opinion). I think investors should be along for the trip.

The media latched onto BBY management's cautious words about the negative impact on margins, due to competitive pricing over the holiday period. Here's my take.

First, I want to quote my original research report on BBY on this subject because this margin challenge was, to some degree, expected:

When I first recommended the stock in July, I forecast that profit margins on many products would shrink, as Best Buy backed up its price guarantee. So what's the expected impact? BBY expects a negative impact of 0.6% to 0.7%. Not exactly a huge deal, in my opinion.

What would be a big deal, to me, is if management came out and said they were not going to aggressively match the competition on pricing. If they said that, I might recommend you sell the stock. After all, this comment would fly in the face of all the good will they've created with consumers with price guarantees.

Instead, management is doing the right thing. They are fighting for each and every consumer, and they are fighting the battle on many fronts; price, convenience, e-commerce, customer service, product variety, etc.

In order to win, BBY has to be a major player this holiday season. They need to get consumers through the door. They have to keep momentum going. So, in my mind, a short-term negative impact on margins (that was expected anyway) isn't the story here.

The story is that Best Buy is fighting to be a relevant retailer of consumer electronics and appliances, and that the business is healthy enough to compete on price. These are good things, not bad things.

The catalysts that form our investment thesis are still tracking in the right direction: the turnaround story is gathering momentum; revamped store layouts are great, online presence growing, and cost savings are bigger than planned. The takeaway here is that you should buy the stock on weakness.

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