The Bullish and Bearish Case for Best Buy in 2014

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Best Buy Co. Inc. (NYSE: BBY) remains in a state of turnaround, although you do not hear the reports of its future death any longer. Best Buy’s woes were as simple as the rise of Amazon.com Inc. (NASDAQ: AMZN) to the point that Best Buy was being turned into the online retailer’s outsourced showroom for free. That was then, but you cannot evaluate Best Buy, or any electronics retailer, without considering the Amazon threat.

Best Buy shares rose nearly 300% from their cycle lows. It was one of the best S&P 500 stocks of 2013. With the S&P 500 up over 29% and a gain of more than 26% in the Dow Jones Industrial Average in 2013, 24/7 Wall St. wanted to run the bullish and bearish cases for Best Buy and other key stocks in 2014.

There are many macroeconomic factors to consider, as well as retail industry issues. Most Wall Street strategists are forecasting higher price targets for the S&P 500. Will the rising tide lift Best Buy again if other ships rise? The Federal Reserve is about to get a new chairman, and it is generally expected that interest rates will rise as the bond buying is tapered. Gross domestic product is expected to tick up in the United States as well.

Best Buy’s bullish scenario is that Amazon now has to pay sales tax too in many states, which lowers some of the obvious advantages. Best Buy has spruced up its stores, focused on higher-end appliances and tried to eliminate its money-losing areas of the store. You also no longer hear about its death every day.

Best Buy does have a bearish case as well. Amazon is still a thorn in its side, and the price-matching online competition that Amazon is pursuing can hurt margins, even if it helps sales. Many of the products that Amazon used to make higher margins on (PCs, flat panel TVs and peripherals) are being driven lower as well.

At 16.4 times current year earnings Best Buy sounds fairly priced. At 14 times expected earnings one-year out, it does not sound expensive at all.

The good news is that analysts now have a $46.50 price target on Best Buy, which implies upside of better than 15%, now that Best Buy shares have pulled back from the recent highs. Recent news from competitor hhgregg helped fuel the retreat. With a $13.6 billion market cap, Best Buy shares are back close to a post-recession high. It seems impossible to expect a continued turnaround in 2014 even remotely close to what we saw in 2013. That being said, the pack of analysts sees upside now that the stock has pulled back off its highs.

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