Category: Stock Market

Continuation from Friday…...When we combine the factors above we begin to understand why Best Buy’s stock was selling at a discount in 1997 and why it started to rally once the performance improved and the company began to grow at a rapid rate once again. The question is, would investors be able to forecast such changes all the way back in 1997 from the fundamental perspective alone?

Absolutely NOT.

The fundamental developments above took years to play out.  And while improved performance could have been anticipated, there was no clear evidence that it would occur. In addition, a few questions remain. For instance, while company’s initial undervaluation and subsequent growth can be explained by the first 1,000% to 2,000% increase in Best Buy’s stock price, it cannot be explained by Best Buy’s stock price surge of 4,000% during the same period of time.  Perhaps technical analysis can offer us a better answer.

TECHNICAL ANALYSIS:

Since the fundamental analysis did not yield a strong buy signal for Best Buy in 1997 we must now concentrate on the technical side of the equation.

As the chart above shows, Best Buy’s stock price collapsed over 75% between November of 1994 and February of 1997. Dropping from $4.70 a share (split adjusted) to about $1 a share.  What’s more, this substantial down move had occurred during one of the strongest bull markets in history. A bull run that initiated at the same time that Best Buy’s stock price topped out, in November of 1994.

Unfortunately, outside of dropping 78%, Best Buy’s stock gave us very few clear technical signs that it would either top out in 1994 or bottom out in 1997. Outside of a clearly defined downtrend between November of 1994 and February of 1997, we have very little to go by. In other words, by early 1997 it was unclear if the company’s stock price was going through another bear market bounce or if it was in the early stages of a massive bull run. It was not until October of 1997 that Best Buy’s stock price broke above $3 a share, giving us the first indication that the company’s stock price has shifted gears and might be starting a sustained bull market run.

In conclusion, technical analysis alone would have failed in giving us a clear buy signal at around $1.25 a share in February and March of 1997. There were NO clear technical signs that Best Buy’s stock price was about to stage a 4,000% rally. Perhaps we will have better luck with our timing and mathematical analysis.

Were You Smart Enough To Buy Best Buy At The Bottom And Make Millions? Google

Continuation from yesterday……..Yet, Best Buy’s story is best told by the number of stores they operate and the margin expansion the company was able to squeeze out of its existing stores.  Leading into its 1997 stock price bottom, the company had increased its store count by 13% with a net addition of 33 new stores.  As of December 31st, 1997 the company was operating 284 stores from coast to coast.  At that time the rate of expansion was significantly slower than the previous three years when the company opened a total of 140 stores.

Further, at the time the company believed that it needed to slow down its store growth in order to re-focus on improving the company’s operating and financial performance. Planning to open just 25 new stores in fiscal 1999, bringing the store count to 309. In other words, prior to 1997, the company over expended its store base by growing too fast and by compressing margins in their existing stores. As a result, the company was going through a rough time. Forced to cut its new store growth and to find a new way to attract and to keep customers.

Hence the lower stock price. Between 1994 and 1997 Best Buy’s stock price declined by over 75%, dropping from $4.50 (split adjusted) to $1 a share. The company was going through a transition during the time. As was mentioned above it was forced to slow down its new store growth from about 47 in the years prior to 1997 to just 25 in 1999. Further, it was searching for a new store concept “Concept III” that would work and that would allow the company to expand their net operating profit margins.  While being able to compete effectively in a cut throat business of electronics retail. Basically, by 1997 the future was anything but certain for Best Buy.

Yet, by 2006 the company was growing rapidly once again, with 822 stores under its belt. Increasing their store count by 290% between 1997 and 2006. The company was able to improve its operating margins from 2.2% in 1997 to 5.6% in 2006. Finally, the sales per retail square foot went from $720 in 1997 to $936 in 2006.

So, Best Buy’s fundamental performance during this time can be summarized in the following fashion.

• Best Buy’s stock price declined due to the margin compression and a slowdown in the new store growth. The company was going through a transitional period as it was trying to find a store concept that worked.
• The company was eventually successful in improving their concept and making it work. Leading to a substantial 150% improvement in their net operating margin.
• The company was then able to accelerate its new store growth, once again, increasing it by 290% over the next 9 years.
• Best Buy was able to cannibalize competition with their better concept and bigger stores, forcing a number of competitors, including Circuit City into bankruptcy (*2008).

When we combine the factors above we begin to understand why Best Buy’s stock was selling at a discount in 1997 and why it started to rally once the performance improved and the company began to grow at a rapid rate once again. Would investors be able to forecast such changes all the way back in 1997 from the fundamental perspective alone? Not really as the developments above took years to develop.

In addition, a few questions remain. While company’s initial undervaluation and subsequent growth can explain the first 1,000% to 2,000% increase in Best Buy’s stock price, it cannot explain why Best Buy’s stock price went up 4,000% during this period of time.  Perhaps technical analysis can offer us a better answer.

To Be Continued On Monday 

How You Could Have Made A Fortune With Best Buy  Google

FUNDAMENTAL ANALYSIS:

As mentioned above, by 1997 Best Buy had a decade of excellence under its belt. In both, the stock price appreciation and the growth of its retail business.  Between 1986 and 1997 the company’s stock price had already appreciated by 1,900% (a 19 Bagger). Yet, things were about to get a whole lot better for Best Buy and the company’s shareholders.

To establish a clear picture of what had happened between 1997 and 2006 must first study the fundamental growth of the company at the time.

As we analyze the data above, one thing becomes evident. Best Buy’s fundamental growth during the time did NOT match the growth in the company’s share price. While the Best Buy’s stock price appreciated 4,000%, shareholder equity and book value grew by only 1000%, net income and earnings per share grew by 1,380% and the revenue base increased by only 333%. While an admirable performance, the numbers above do not justify the rise in the stock price from the fundamental perspective alone.

We must now go back and study the 1996-2007 period in greater detail in order to determine why the company was selling at such a discounted level and what fundamental changes would occur to propel the stock price higher.

In 1995 the company began enhancing its store format into the so called “Concept III”.  The concept featured a larger redesigned store format created to produce a more informative and exciting shopping experience for customers.  The standard size of the Concept III stores was increased to 45,000 square feet and it was intended to be as good as or better than the selections offered by Best Buy’s competitors in each of its principal product categories.   In other words, Best Buy was starting to focus more on hands on demonstrations, bigger stores and providing customers with the most desirable shopping experience possible.

Why You Should Have Bought Best Buy’s Stock Instead Of Windows 95  Google