Be Careful Shorting Best Buy Stock

One day it’ll make a great short.  Just not today.
Should you short Best Buy (NYSE:BBY)?  Chances are, if you do, you’re going to get burned in the short-term.  Over the long-term, the company doesn’t stand a chance.  Shorting Best Buy stock, then, depends either on your tolerance for pain, your time horizon, or just having patience.
I haven’t purchased a single electronic item in a retail store in years. I research stuff online, go to the store to examine the physical product, but then purchase the item online. Even if the storefront price is the same as online, which is unlikely, shipping is likely to be free.
In some cases, tax won’t be collected.  In most cases, the actual price will also be less than in the store.  Sometimes that difference may be substantial.


That’s why Circuit City is dead.  How long before Best Buy stock is in the trash heap when we have Amazon (NASDAQ:AMZN)?  You cannot run a storefront in the days of a massive Amazon shipping facilities.
Best Buy can’t even be taken private.  The company’s founder tried to do it, but private equity wouldn’t get involved.  There’s a reason for that.  Private equity firms buy companies because of two things:  growth and/or consistent cash flow.
PE firms love cash flow.  They like to swoop in, negotiate a tough deal, then walk away with something that will pay for itself in short order.  They collect the cash flow every year thereafter, and then may even spin the company back off into an IPO.
There’s neither growth nor consistent cash flow at Best Buy.  In FY13, FCF was $550 million.  In the TTM, it’s been -$100 million, $184 million, $545 million, and $200 million.
The good news is that Best Buy stock is still cash flow positive.  The bad news is that it isn’t consistent and is paying a dividend.  It should be shoring up its coffers, considering that comps are flat to down.
I mean, during the holiday season when things are supposed to be at their brightest, Best Buy saw same store comps fall 0.9%, on a 2.6% decline in revenue.  EPS was down 16.5% YOY, and operating margins were down 1.8%.
Q1 wasn’t much better.  EPS only rose a penny, same store sales were down 1.9%, and revenue was down 3.5%.
There’s been talk of a “turnaround”, but why should I be impressed by an “online strategy?”  Best Buy will never compete with Amazon on price, and if it does, it’ll make next to nothing on those sales.
Then there was an announcement that Best Buy would become a financing partner for Solar City.  On the one hand, that’s a great thing.  That’s a high margin product.  On the other hand…solar products?  At Best Buy?
Despite this lukewarm-to-negative news, I just wouldn’t short Best Buy stock…yet.
First, a clear sign to short is when the company’s debt service starts to drag net income into negative territory.  Best Buy isn’t there yet, because it only has $1.6 billion in debt that it pays about $100 million in interest on.
Another sign to short Best Buy stock is repeated quarters of negative free cash flow.  We aren’t there yet, either.
Best Buy stock has almost $3 billion in cash on its balance sheet.  I like to short cash-poor companies.
What we have here is what mutual fund guru Ron Baron calls a “sunset industry”, meaning it is closer to its end than its beginning (a “sunrise industry”).  That’s different from a “short now” company.
So stand in the wings and wait.  Best Buy stock will die.  Just not today.
Lawrence Meyers owns shares of Amazon.

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