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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Monday, September 12, 2005

The Best Buy (BBY) position

I promised to continue to follow up on this position as it unfolds. If you'll recall, this is about month 3 of this position - and it looks like we're going to be "long" best buy for some time longer. How long? Who knows...BBY reports quarterly results tomorrow morning, before the market opens. Thus, the last chance to get out of this position before the release is today (but since we've taken some profits, a full exit at this point seems illogical).

Let's quickly revisit a chart of BBY to see how it's done in the past year. (Chart courtesy of Stockcharts.com)

We took some partial profits in the circled area. To be exact, the date was July 20th. On the chart you'll notice that's just before the downswing before the jump to the recent high. Not too bad - we can't be "perfect" (and trying to manage a position "perfectly" generally leads to freaking out and losses).

By taking some profits, we found it much easier to sit through the drawdown in late August. Some may have actually re-purchased the shares that we sold in this range. That is a very valid move, given that you really believe in the position and the fundamentals suggest that it is prudent. However, I probably wouldn't buy back the same amount that I had sold. Perhaps buying back about 1/2 of what we sold makes sense. It depends, however, on many factors (portfolio size, market conditions, Best Buy fundamentals, etc...the list goes on).

Anyhow, the drawdown was not too painful, mostly because we took some profits. We also endured a stock split (now we have more shares). Notice how the position gets easier to manage after we've taken some profits. We can rest somewhat assured that we've made some money.

So what do we do? Best Buy, according to CNBC is expected to report earnings of 0.38, on average. Last quarter they announced earnings of 0.34, 70% higher than analysts' expectations! Will that happen again? Unlikely. A year ago BBY earned 0.35 a share. So, 0.38 seems to make sense. Will the 2nd quarter's momentum carry over into the 3rd? I guess in 24 hours we'll know.

I will say this: It's unlikely that BBY misses that number by a wide margin. Why do I say that? Simply because BBY, on a yearly basis, has not had a lower growth year in 5 years. I expect that trend to continue. Best Buy is the best of the retail electronics stores (Gamestop is probably the video game winner, but doesn't compete in the broad electronics sales market with BBY).

So, with what looks to be more upside than downside yet, I'd continue to hold. Technically, the chart agrees...with low volume during the price decline in late August.

If BBY announces a bad number and we need to get out, we will...and probably still at a modest profit.



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