Continuation from yesterday……
TIMING & MATHEMATICAL ANALYSIS:
After going public in 1985 at around $0.05 a share (split adjusted) the company’s share price gradually increased until November of 1994 when it set an intermediary top of $4.71. Regrettably, after looking at the stock price composition my mathematical and timing work has failed to yield a clear result. In other words, Best Buy’s stock price had no clearly identifiable cyclical, structural or internal time frameworks associated with it.
While a rare occurrence, some stocks do not have such a structure. They tend to oscillate on their own accord and without as much of a hint as to what the future holds. It would not be at all inappropriate to file such stocks under a “Wild Animal” category and forget about them. Particularly when the fundamental and the technical analysis results had failed to yield anything worthwhile. Based on my personal experience, it is best to steer clear of such stocks.
CONCLUSION:
Best Buy Inc gave us no warning or evidence in 1997 that it was about to stage a massive 4,000% rally over the next 9 years. In fact, all of our analytical metrics had failed in predicting the upcoming rise.
Sometimes it is just as important to know when it is time to take a position as it is when it is time to walk away. Best Buy presents us with a clear illustration as to why you should have walked away, even though the stock was about to stage a massive rally. Despite its general undervaluation at 1997 bottom, the future was anything but clear.
From the fundamental perspective, there was no way to know if the company would be successful in making their new store concepts work and if they would be able to improve their margins. In addition, it was impossible to anticipate when the company would accelerate their new store growth and to what an extent. Certainly not in 1997 and certainly not when the company’s stock price was at around $1.25 a share.
Out technical and mathematical analysis did not fare that much better. Both had failed to predict and upcoming surge in the share price. While our technical analysis did suggest an entry point in November of 1997 at $3 a share, when the stock price broke above the previous high, neither the fundamental nor the mathematical side of the analysis would warrant a position.
In conclusion, even thought Best Buy’s stock price went on to gain 4,000% between 1997 and 2006, there was no prudent way to take a position in the stock in either 1997 or early 1998. By the time the fundamental picture was starting to clear up, the stock price has already surged to $40 a share. In other words, the only way to take position in the stock was to speculate or to have it as a small allocation within your overall well diversified portfolio. It would have been impossible to benefit otherwise.
Final Prescription: Sometimes It’s Better To Walk Away
