TAKING STOCK: Best Buy ain't the worst buy

Dear Mr. Berko: I bought 100 shares of Best Buy in the beginning of 2011 at $32, and now it's $26. Please tell me what you think its prospects are for this year and next. Do you think I should buy another 100 shares or hold what I have? Or should I sell my stock and take a loss? Also, what are your thoughts on MF Global? A friend who owns a farm gave MF Global $38,000 for a short time period because they promised safety and good rates. My broker thinks I should buy another 100 shares. What do you think? TM, Moline, Ill. Dear TM: Management at Best Buy (BBY-$25.77) expects to report revenues of $51.9 billion in 2011, up about 2 percent from 2010 revenues of $50.3 billion. It's tough going for this 4,500-unit retailer that sells consumer electronics, office products, entertainment software, appliances, computers, cameras, and the like in the U.S., Canada and Europe. I reckon revenues for this year will be flat as a flapjack, while earnings could be about 8 percent higher than last year. This big-box store (about the size of two football fields side-by-side) is facing weak consumer spending in the U.S. and overseas; revenues at BBY's Carphone Warehouse (the largest independent mobile phone retailer in the world, with 2,400 locations in 10 European countries) have been grinding down. (This, though, is simply a reflection of the recession in Europe, which certain Europeans won't acknowledge because it's politically incorrect.) Game sales and appliance sales are lackluster, as buyers have been more selective, purchasing mostly merchandise that has been largely discounted. As a result, BBY's net profit margins have declined significantly to a weak 2.5 percent in 2011, and management seems to lack the moxie to improve that number for 2012 or 2013. Management is trying to streamline its operations, its product selections, and its poor store service, but consumers are gravitating to lower-cost rivals like Costco, Amazon and Wal-Mart. Meanwhile, fierce competition across multiple retail channels is making progress much more difficult than management anticipated. I think U.S. retails sales for 2012 and 2013 will be unimpressive, and that's bad for BBY. The consumer is losing confidence; his wages are lower this year than last year or even a decade ago; his debt is at near-record highs; and the job picture still looks bleak. Europe is in a recession, and U.S. factories are producing fewer products to be shipped overseas. And because the euro is weak, U.S. exports to Europe have become more expensive for European consumers, whose collective incomes are diminished by high unemployment. And that's also bad for BBY. On the plus side, BBY has an excellent balance sheet: just 363 million shares outstanding, each with a book value of about $20, and shares trading at a low of 6.6 times this year's expected earnings. That's an unusually low price-to-earnings ratio and in my opinion, is not an indication that BBY is undervalued. Frankly, this low P/E ratio suggests that there may be weakness brewing in the near future. There are 24 analysts who rate BBY: four have a "strong buy," two have just a "buy," 17 tell you to "hold" and one brave soul recommends a "sell." Frankly, I don't know what "hold" really means. In my thinking, if a stock is not worth buying, why would you hold it? I think "hold" is Wall Street-speak for "We don't have the guts to tell investors the truth." Sell your 100 shares and take a loss before that loss becomes larger. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2011 Creators Syndicate Inc. Published: Fri, Jan 13, 2012