One Company that Belongs on Your Watch List Right Now
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Please notice the the headline of this article does NOT say "One Stock You Should Buy Right Now" or "One Company that Belongs in Your Portfolio Right Now.'" Because it might not. In fact, there's a pretty decent chance that this is not a stock for you or your portfolio.
The stock I'm here to talk to you about is Best Buy (NYSE: BBY). This tech giant is actually all over the news right now for a couple reasons. In fact, at the time of writing (mid-afternoon of August 6th,) it's up over 11%. But, before I get to the news, why don't we have a proper introduction.
Best Buy: profile of a company
Best Buy has several strengths that lead to it's success. It edged out the battle a few years ago between rival Circuit City, forcing the shutdown of all the tech giant's stores and making the company continue all business exclusively online. Those were the glory days for Best Buy. So, why is it now a struggle for Best Buy just to stay in business?
The new era has nearly killed Best Buy. The internet shopping revolution, particularly. It's killed countless others too, including competitor RadioShack (NYSE: RSH), one of the fading threats to Best Buy. I'm guilty, as are many of you. The other day, I walked into a Sunglass Hut and saw a great pair of Ray-Bans. I picked up the price tag and saw $175 was the price to pay for such a beautiful pair of eyewear. Of course, I didn't want to pay that much for plastic. It didn't seem fair to me that fake glasses nearly perfectly replicating the real ones can be purchased on the street for a dollar. Still, I don't like supporting the fakers, and I believe that the lens is truly important, so I am now a proud owner or real Ray-Bans. But I certainly wasn't about to pay that price. So, I stole them.
No, I'm kidding. I didn't steal them. But I practically did, according to Sunglass Hut. What I did was what an increasing amount of people are doing every day accross the country. I pulled out my phone and scanned the barcode with an app--I prefer Google Shopper or Google Goggles. When I scanned the barcode, Google (NASDAQ: GOOG) searched the entire internet for the exact same pair of glasses--Ray-Ban New Wayfarers in a dark havana with brown gradient lenses. Sexy, I know. If only you could see them on me.
Anyways, Google brought back to me a new pair that someone had listed on Ebay for less half the price of the store in the mall. So, I bought them online for $70 and left the store with $105 extra dollars in my wallet.
So, why is this relevant? Well, this is exactly the plague hitting Best Buy. Of course, having the physical stores and customer service and advertising, Best Buy incurs high costs. Yet, they make up for that with high mark-ups. So, what is the consumer solution to high mark ups? Find the same product from someone who doesn't need to mark up so much. Enter, internet sellers. People who have internet stores can sell products and feed off of the advertising that Best Buy does. They dont need to have physical stores, saving tons of money. And, finally, they don't need incredible customer service. All of this saves them a ton of money, allowing them to price their products much more reasonably. Win for them, win for us. Loss, however, for Best Buy.
So, what does this mean for BBY? Is it a buy? Well, most in the Foolish community certainly don't think so, giving BBY a CAPS rating of only 1 star. Frankly, I can't disagree with you. The way the world is heading, it looks as though Best-Buy's huge mark-ups won't stand a chance. Unless they find a way to adapt. But, it seems they haven't yet. Although there are ways: just look at Costco (NASDAQ: COST). They sell nearly everything that Best Buy does (my local one has the big TVs right inside the entrance,) but they also have all of their other merchandise, plus the TVs are wholesale. But, adapting a business model to become like Costco could be a lot of work for Best Buy. Maybe it'd be better to stick to technology.
In the news
So, why is Best Buy making headlines? Well, Richard Schulze is the man to blame for that. He is the company's founder and formerly served as a chairman. He recently submitted a letter to the tech giant expressing "an unsolicited, highly conditional indication of interest" to purchase the shares of Best Buy that he doesn't already own. This enormous deal values the company at $8.8 billion. There's your reason for the 11% gain. A similar situation arose about a month ago when Books-A-Million (NASDAQ: BAMM) chairman Clyde Anderson also proposed the same thing for his company. However, Books-A-Million is another stock that I would urge you to look at very carefully (and nudge you away from considering) before pressing the buy button.
"After assessing all of my options, it is my strong belief that Best Buy's best chance for renewed success is to implement with urgency the necessary changes as a private company," Schulze said. Clearly, he thinks he knows the way to rescue the company. Still, he better do so quickly, because Best-Buy's 1-year graph doesn't look beautiful.
The Foolish bottom line
So, after all, is Best Buy left as a best sell? Well, in my opinion, it's best to stay away from. But, keep them on your watch list. Maybe Schulze does have the key. After all, he has been in the business longer than anyone. Maybe he knows a secret that we don't. So, stick around. Don't give up too soon. But if you're thinking about buying now, I wouldn't be on your side.
Of course, there are some stocks that should be bought right now. Check out my latest report in which I detail One Stock to Buy Right Now. Looking for long-term growth? Check out 5 Stocks to Keep the Rest of Your Life, and One Perfect Long-Term Stock...And the Secret Behind its Success. Finally, looking for some insider secrets? Check out a new report, How Apple's Acquisition of AuthenTec Will Affect Your Portfolio...And Your Next Phone.
Michael Nolan owns shares of RadioShack. The Motley Fool owns shares of Best Buy, Costco Wholesale, Google, and RadioShack. Motley Fool newsletter services recommend Costco Wholesale and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.