Best Buy (BBY) was particularly irksome. We thought that the core debate was whether or not the company could compete with Amazon. The answer at this point is that maybe it can and maybe it can't. (Despite the consensus view, our store surveys have repeatedly shown that there is no price benefit for consumers to browse at BBY and then purchase at Amazon.) There has been some deterioration in BBY's domestic performance, which we attribute to a lack of a "must have" consumer electronics product, rather than an erosion of BBY's competitive position. While we held the shares, three unexpected problems emerged: First, BBY depleted $1.3 billion of its cash resources by paying a double-digit multiple for Carphone Warehouse's share of the Best Buy Mobile profit stream. The market promptly revalued those earnings to BBY's mid-single digit multiple. Second, in the most recent quarter, BBY's international profits collapsed. In particular, comparable sales in its Chinese business fell 28% as the Chinese economy appears to have hit a wall. Finally, the company dismissed its CEO over his personal conduct, and also removed the Chairman for failing to respond properly to the CEO's misbehavior. As a result, the company has an interim CEO and is trying to come up with a strategy. We worried that this could lead to additional business disruption so we exited with a loss.
The Strategy of Ben Graham – Warren Buffett’s Mentor
From 1923 to 1957 Warren Buffett’s mentor, Ben Graham, followed a strategy of investing in net-nets. He said: “It always seemed, and still seems ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the...net current assets alone…the results should be quite satisfactory. They were so in our experience, for more than 30 years.”
Today net-nets are rare. They are collected under GuruFocus’ Net-Net Screener. GuruFocus also publishes a monthly newsletter which recommends the safest net-nets. All of these are included in GuruFocus Premium Membership.
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