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|
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|
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: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 a period of many years.