Play the Apple Watch with This Retailer

With Apple’s (Nasdaq: AAPL) long-awaited Apple Watch hitting stores in April, there is no shortage of speculation on how investors can profit from the release.
Clearly, the direct investment is to buy shares of Apple itself. But let’s be honest, most investors already own it. So check that one off the list.
Another option for some exposure is to buy shares of consumer electronics retailer Best Buy (NYSE: BBY). To be clear, the big picture story here is more about the management-led turnaround than about the Apple Watch.
But without a doubt, the popularity of Apple products is driving shoppers through the doors of the once beleaguered Best Buy.
On Best Buy’s recent fourth quarter earnings call, CEO Hubert Joly said that the product cycle in mobile phones (as well as TVs) is one reason the company delivered better-than-expected results.
I think the Apple Watch in particular could drive foot traffic to Best Buy, since the device is so new. Potential buyers will probably want to check it out in person, rather than just buy online.
So I don’t think it’s a big leap to assume that foot traffic for the Apple Watch will be stronger than for the iPhone 6, given that most people already had a good sense of what that phone was like.
Beyond just the Apple Watch potential, Best Buy is an attractive investment. When the company reported last week, it finally hit one out the park.
The most important takeaway was that all the hard work the company has done over the past 18 months is showing in results. Domestic sales finally grew, expanding 3.2% in Q4, with same-store sales up 2%, led by strong TV and smartphone sales.
The closely watched online channel was up 9.7%, and profit margins even expanded (domestic gross profit was up by 1.2% to 21.2%). The latter helped Best Buy turn in earnings per share of $1.48, which beat expectations by a very nice $0.13.
Now that the company is starting to generate what looks like sustainable cash flow, it is finally in a position to return some cash to shareholders. It’s starting with a $1 billion share buyback program over the next three years. And it also just boosted its dividend by $0.04 (a 21% increase) to $0.23, meaning the forward yield is now around 2.3%.
Investors will get a nice special dividend of $0.51 as part of a legal settlement over LCDs. That translates into an extra 1.3%, which will get paid out on April 14 (you have to own the stock as of March 24).
Best Buy is now looking like a real contender in the consumer electronics space. It’s still a tough business to be in, but with the exit of Radio Shack – and what I perceive to be the buzz surrounding Best Buy and the current product release cycle – I think it’s a growth stock and income investors should own for the long term.
Over the past 20 months the stock is up 43%. That’s a far better return than the S&P 500 (up 27.5%) and even the Russell 2000 Small Cap Index (up 21%) over the same timeframe.
In the coming year, I think we’ll see relatively flat top-line revenue, but with continued big improvements in cash flow and profit growth.
There is, however, ample room for a surprise on revenue. It’s probably the biggest area where Best Buy can impress the market. So if the Apple Watch sells like hotcakes, as is expected, look for shares of Best Buy to rise on speculation that revenue will be better than expected.
After such a large market rally in February, I wouldn’t load up on shares of Best Buy (or most stocks for that matter). But buying a little now, and more later on any pullback, will give you some exposure to what I believe will be a big winner.
Click here to learn another powerful way you can profit off the launch of the Apple Watch.

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