Best Buy Co., Inc. (BBY) Preparing Bull Trap

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Best Buy Co., Inc. (NYSE:BBY)Best Buy Co., Inc. (NYSE:BBY) is preparing a bull trap for investors this summer.

The company’s shares are up 126% so far this year, spurred by a strong dividend and stock buybacks. The company has continued to rise in value even as founder Richard Schulze, who holds 20% of the shares, ended his push to take over the company and returned to work as “chairman emeritus.”

Explaining Microsoft’s move

Schulze has done very well by his dance for control, essentially doubling the value of his holdings while doing nothing to actually increase value. The latest move in that direction is to basically give Microsoft Corporation (NASDAQ:MSFT) control over its PC sales, and while some are calling this “a critical strategic move” it’s really nothing of the sort.

That’s because Microsoft has had de-facto control over Best Buy Co., Inc. (NYSE:BBY)’s computer sales for years. BestBuy was never a Macintosh shop. In past years it trotted a bunch of Microsoft OEM boxes and waited for the customers to arrive. Their failure to arrive is behind the company’s fall.

So this is a move of weakness on both sides. BestBuy knows its old strategy was a loser and has nothing to replace it. Microsoft Corporation (NASDAQ:MSFT) will use its control over 600 Best Buy Co., Inc. (NYSE:BBY) locations to push its broader strategy of tablets and phones, not just PCs.

BestBuy numbers a sad story

Meanwhile, Best Buy Co., Inc. (NYSE:BBY)’s financial results make no sense in context of its stock’s move. The company eked out an operating profit for the quarter ending May 4, but it was the first such profit since last summer, and a fraction of the $158 million earned in the same period a year earlier.

On top of that the company is shrinking, due to store closings. Sales for the May quarter were $9.3 billion, down by nearly a third from the Christmas period but, more important, down 10% from the same quarter in 2012, when sales were $10.37 billion.

Despite this, the company continues to pay a dividend, $0.17 per share. That’s over $60 million going out the door each quarter – the company hasn’t been able to sustain such a dividend pace since 2011.

Best Buy Co., Inc. (NYSE:BBY) holds its annual shareholders meeting in June, where it will ratify Schulze’s two new appointments to the board, in order to maintain peace there. But it next reports earnings in August, and by that time it will be impossible to hide what’s actually happening from shareholders.

I believe Schulze is waiting for that opportunity. The stock crashes, he comes in with a new buyback offer, at a price much lower than he previously contemplated, and looks like a hero, while he squeezes the newly-private company for enough cash to come out ahead.

So buy Microsoft?

Microsoft Corporation (NASDAQ:MSFT) has been engaged in something similar since April, boosting its stock price 24% with hope rather than actual results. That’s a $50 billion increase in the market cap without any change in the market fundamentals.

The company’s most recent results, for the quarter ending in March, show that it is on a profitable path, albeit one with only limited growth. Revenue was $20.5 billion, net income $6 billion, and about $2 billion went out the door in the form of dividends.

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