New Bill Set to Level the Playing Field for Best Buy

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The inclusion of speculation within your portfolio is one of the necessities of a diversified portfolio in a new age market. These are companies that have “potential” catalysts that could lead to significant gains. As of late, Best Buy (NYSE: BBY) has become a popular choice for those who are acquiring a speculative stock in their portfolio, as it broke out of its trend last Friday to post gains of 7.38%. However, the question is whether or not the stock is a good buy right now?

Why Has Best Buy Fallen?

So why would now be a good time to buy Best Buy? Over the last three years the electronics retailer has seen flat and declining revenue as retailers switch to cheaper online retailers such as Amazon (NASDAQ: AMZN) for electronic purchases. In five years Best Buy has lost 62% of its value while Amazon has increased in value by 263% during the same period. Therefore, as you can see, it is clear that investors have preferred Amazon as it continues to grow rapidly, and investors have avoided Best Buy as some anticipate the second coming of Circuit City.

What is the Catalyst?

Most are aware that Best Buy founder Richard Schulze is in the process of attempting to take the company private. While this remains a strong possibility there was news on Friday that makes Best Buy more attractive as a potential investment. On Friday Amazon fell lower by more than 1.5%, while Best Buy rose over 7%, due to news that Democrats and the GOP are working on a bill in Congress to resolve the online sales tax issue.

Up until recently, there was no sales tax for many of these online-based retail companies, but now certain states require that consumers pay sales tax when purchasing products from companies such as Amazon, eBay, and Overstock.com. According to Reuters, a modified version of the sales tax bill will be finalized and sent to President Obama this year. If approved, it would mean that consumers would have to pay sales tax in all states from purchases on Amazon and other online retailers.

The likelihood of this bill passing is great! Currently, the country is missing out on a lot of potential revenue from online sites, and with online sales being more than 5% of all retail sales (and growing) it seems likely that a bill to implement a sales tax would be passed. When you think about it, the fact that this bill has not been passed is not an issue of politicians not wanting sales tax from online retailers, but rather politicians not addressing the issue in the past, or them not moving at the speed of innovation.

How Does this Help Best Buy?

This new bill directly benefits Best Buy. With Amazon offering tablets, smart phones, computers, and all other electronic devices at a cheaper rate, consumers have used Best Buy to window shop and then to purchase from Amazon. Best Buy, who charges sales tax, simply can not compete with the low prices of Amazon, nor the additional 5%-10% that consumers save by not paying sales tax. This bill would level the playing field for Best Buy, and consumers might be more likely to purchase product while at the electronics retailer. After all, a savings of $10 is not near as attractive as a savings of $70 when you account for sales tax.

Conclusion:

This could be the catalyst that Schulze has been anticipating, therefore it will be interesting to see how it may affect the negotiations between the founder and the company. I think this news makes Best Buy very attractive as a potential investment. The stock is trading with a price/sales of just 0.10 and has a dividend yield of 4%. As a result, it might make a very nice speculative investment within your portfolio.


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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