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