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Analyst Ratings and Best Buy Stock

March 26, 2013 | About:
The Science of Hitting

The Science of Hitting

257 followers
Figuring out exactly what service Wall Street analysts provide for investors (meaning people who think like business owners) has become increasingly unclear to me. Financial theory suggests that a company’s intrinsic value is equal to the present value of expected future net cash flows to the owners of the business, discounted at the appropriate rate; yet in their attempt to serve two masters, most analyst reports explicitly state that the research presented is offering opinions (buy, sell, hold) with the intention of outperforming in the coming 12 months – a goal that leads to a critical question: Are analysts looking for undervalued stocks or catalysts? In the case of a company that’s undervalued, but likely to face short-term issues, what is our equity analyst to do?

The volatility surrounding Best Buy (BBY)'s stock price in the past few months shows just how quickly fundamental analysis becomes a game of follow the leader/stock price. A year ago, BBY common traded in the low to mid $20’s per share; for months on end, culminating at the end of 2012, the stock continued its decline – all the way to a low of around $11 per share. For the analyst needing to make a 12-month recommendation, the recent activity suggested that there was little love for Best Buy – and no reason to suspect that would change. As such, the analysts herded together to present such a view (data presented is from Marketwatch.com):

BBY Analyst Ratings Three Months Ago
Buy 1
Hold 21
Sell 1


Fast forward 90 days, and the market has suddenly become enamored with Best Buy – with analysts being the giddiest of all. With the stock up more than 100% from its lows – lows reached roughly 90 days ago – here’s the current recommendations from the same community (most of the upgrades have come in the past few weeks):

BBY Analyst Ratings Today
Buy 9
Hold 16
Sell 1


This is off a relatively small sample size, but the change is quite clear – from a single analyst recommending Best Buy common stock at half the current valuation a short three months ago, more than one-third of all analysts covering the company now consider BBY a buy.

The analyst group presented has pointed to a couple things in justifying these upgrades, namely a change in management, a 0.9% jump in comparable sales in the fourth quarter, and the company’s willingness to fight back on prices against Amazon (of course this doesn’t address the bigger concern of cost structure – the sole reason why so many are calling for the death of brick-and-mortar, or the fact that many of the company’s product categories continue to show the strongest shift to ecommerce; these questions will likely be saved for when the stock starts to sputter).

This brings up an important question: If analyst estimates are based solely on cosmetic changes or short-term improvements or declines in business trends – with little to no concern about how those changes relate to valuation or the attractiveness of the common stock – then what good are analyst recommendations? How can you be so concerned with near-term price movements – as mandated by their 12-month forecast horizon – yet still focus on intrinsic value?

I guess it will take somebody smarter than myself to circle this square…

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.3/5 (23 votes)

Comments

Cornelius Chan
Cornelius Chan - 1 year ago
"You know Wall Street," Warren tried to reassure me. "People don't think in a long-term way there."

— Personal History, Katharine Graham
The Science of Hitting
The Science of Hitting premium member - 1 year ago
CWR,

Great quote - thanks!

luishernadez
Luishernadez premium member - 1 year ago
Science,

Great article, thanks for posting.

Regarding WS analysts, that´s why I NEVER look at analysts recommendations and/or reports. They are completely useless. They are definitely playing a different game than all of us (value guys). Their game is the fluctuation of the price for the next 1-3 months. That´s it.

The Science of Hitting
The Science of Hitting premium member - 1 year ago
Luishernadez,

Agreed! Thanks for the comment!

Please leave your comment:


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