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The Flawed Logic of Best Buy Co., Inc. (BBY) Bears

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The sheer volume of articles written about various stocks each and every day almost guarantees that a significant portion of that writing will be complete and utter nonsense. Common offenses include cherry-picking numbers, making arguments that even a fourth grader could see through with ease, and showing a plot of the stock price and claiming it proves something.

Best Buy Co., Inc. (NYSE:BBY)

Best Buy Co., Inc. (NYSE:BBY) is a good example of a stock which people love to bash. I recently stumbled upon this article that claims that Best Buy stock is poised for an “accelerated free fall.” The author makes a series of arguments which I will go through one by one.

1) Best Buy Co., Inc. (NYSE:BBY) is losing money

The article claims that Best Buy Co., Inc. (NYSE:BBY) is losing money, with a negative profit margin of -0.45% and a negative return on equity of -7.29%.

Best Buy Co., Inc. (NYSE:BBY) is not losing money.

The net income is negative due to a massive goodwill impairment and some restructuring charges. The free cash flow, which tells you how much money Best Buy Co., Inc. (NYSE:BBY) actually made during the year, sat at $965 million. Even better, in a previous article I wrote about Best Buy Co., Inc. (NYSE:BBY) I calculated owner earnings to be around $1.4 billion. Return on equity, then, is either 26% or 37%, depending on which number you use. The net income matters only to the IRS, as it is an accounting number and not indicative of the actual profit.

2) The buyout deal failed

The author suggests that most of Best Buy Co., Inc. (NYSE:BBY)’s stock gains were a result of the buyout deal proposed by Richard Schulze. This is demonstratively untrue. The Best Buy buyout saga ended on Mar. 1, and on that day the stock closed at $17.16. At that point the stock was up from its low in December of about $12 by 43%. Since the buyout deal collapsed the stock is up another 29%. Why would the stock continue to rise after the deal was dead if the deal was the only thing propping up the stock? Well, because it wasn’t.

3) The competition is too strong

Best Buy does face serious competition, with Amazon.com, Inc. (NASDAQ:AMZN) arguably the largest threat. For a long time Amazon had an automatic price advantage because it avoided charging sales tax, but this is now changing in many states. Along with this development Best Buy recently implemented a price-matching policy, completely eradicating any price advantage that Amazon has.

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