Best Buy Shares Tumble

By Scott Hornby | December 13, 2005 AAA

In a piece a few weeks ago titled, Higher Energy Costs and Consumer Spending we talked about, and brace yourself for this, the impact of higher energy costs on consumer spending. Now, aside from the rather explicit title I thought it was a well written piece and made many valid points.

In the piece Chad Langager specifically mentioned one of the targets of today's market bears – Best Buy (BBY) – whose stock price shed nearly 12% after missing Q3 EPS estimates by a nickel ($0.25 vs $0.30). The drop represents approximately $3B of market cap.

In the piece we noted, "We could see companies who sell big ticket items like Best Buy (BBY) hurting as consumers spend less on electronics including televisions, computers, and videogames. It is difficult for the average family to justify purchasing a $3,000 television when their discretionary spending is being greatly diminished as a result of energy costs."

I certainly don't want to go on a rant about this, because believe you me, there have been instances of stocks that we have been bearish about in our market commentary that have subsequently – almost in a spiteful fashion might I add – shot up in price (for more on this check out Taking Beverages to the Extreme or ?).

However the point I want to make is how critical this quarter (Q4) and the Christmas season is going to be for retailers. The inevitable hits and misses are going to come to light next earnings season. Betting one way or the other, in my opinion at least, is pretty gutsy. I believe this for a number of reasons, not the least of which it the fact that it is really a side bet on a number of things including energy prices, how harsh the winter is (demand for energy), how much shopping is done online, etc. Basically there are a number of factors that will lead to strong or weak sales for retailers, none of which are uncomplicated.

If you look at the Investopedia Advisor's model portfolios you will notice that we are very light in the retail sector, in fact we own only one retailer. We consider the one retailer we own to be best of breed and somewhat insulated from many of the forces regularly affecting retailers - including today's stock market dud - Best Buy.

As a side note, I fully admitted earlier that we, from time to time can be wrong. Anyone in this business can be. However our philosophy regarding selecting companies and delivering stock ideas to our members is one of "an inch wide a mile deep". That is to say we pass over literally thousands upon thousands of stocks to bring our members only the very best of the best each month in our members only newsletter.

So far the strategy has worked well, as of today we had only three losers (which we still like) in a portfolio of 19 (sitting at -13.74%, -9.42% and -4.03% respectively) with 13 double digit gainers and 1 triple digit gain and an average gain of approximately 30%.

If you want to give yourself an early Christmas present why not check out the Investopedia Advisor risk-free for 30 days. Click here to learn more.

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