Overuse of the Term Value Stocks–A Best Buy Saga

JP Morgan (JPM) came out with its list of top 9 value stocks for 2014. Best Buy (BBY) made the list as as stock that presents clear value for 2014. According to them, the company has made the competition in its big box format irrelevant, and the improving economic trends and broader GDP growth should help Best Buy and other stocks on their list in growing their revenues.

The recommendation came out on Dec 30, 2013. On that day, Best Buy stock closed at $40.01/share. 2013 was a great year for Best Buy, with the stock almost tripling. However, when this recommendation was made, the stock was close to its 52 week highs and JP Morgan’s analysts would have had few days of data to make a preliminary estimate on sales performance during the holiday period. The company was still not profitable.

Today, the company reported a speed bump in the holiday season and the stock has declined some 27% as of this writing.

What Represents a Clear Value?

I posit that the term “value stock” gets bandied about quite liberally in the media and on the Wall Street. Best Buy was, and still is, a turnaround story. As with all turnaround stories, the final outcome depends on many factors. Management strategy and execution is just one of these factors. You also need to worry about competition, customer demand, weather (for the holiday season), pricing strategy, etc. The problem is that most of these things are future and unknowable. If the bulk of your analysis depends on estimates and best guesses about the future, in 99.99% of the cases it will be wrong and in those situations you cannot use the term “clear value”.

Or at least you should not be allowed to, with a straight face.

Perhaps the company was a good value at $15/share or maybe it is a good value now at $27/share. We don’t know. The company is not profitable, there are many challenges ahead and the value of the assets still (at these reduced prices) do not support the stock price. Retail as an industry is going through many disruptions and quite likely an investment bank such as JPM has much greater insight than the rest of us. But in the best case, it is still a crystal ball.

Where to from here?

If you have owned the Best Buy stock for the last year, you are still ahead of the game and have profits. As long as you believe in purchasing good values and selling stocks where the value does not exist or is not clear, this should be a good time to exit.

I will reiterate, the value of the Best Buy stock today will become clear in the hind sight. Until then, the lack of clarity suggests a clear and present risk.

It is ALWAYS a good idea to be conservative in your expectations and avoid risk where you can in investing.

I should have written this article 2 weeks ago when JPM list came out. In my defense, I do not follow the analysts and was blissfully unaware until today. And frankly, I am not overreacting to this one situation that may be one off.

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