Circuit City Embarrasses Research Guestimates

Stock Tickers: CC, BBY, TWTR, RSH, RSC, CONN

Circuit City (CC) is an example of how there are still in today’s age perfect violations of the efficient market theory.  Last week we saw a drop in Best Buy because of margin pressures and weaker earnings expectations.  If you EVER see ‘weak’ Best Buy ‘anything’ you have to assume that Circuit City is as bad or worse.  PERIOD.

BBY shares fell 5% on their news and were down another 4% between then and yesterday’s close; BBY is down another 1.5% pre-market today.

Circuit City is not where people go for fun like they do at Best Buy.  It is where people go that want some of the consumer electronics with fewer distractions and less of a crowd than there is at Best Buy.

I don’t mean to slam Circuit City here, but this is an observation time after time and has been the case personally seen in more than 1 city.  But the company posted a loss on guess what: Price Cuts.  That is margin pressure from competitors.  So what is the surprise?  The company has a history of being a disappointment, and even though this proves the ineptitude of management this should have been expected.  If Best Buyhas a sniffle, then Circuit City has a communicable disease.  If Best Buy is blowing the doors off the hinges and going gangbusters, then Circuit City is likely to have a decent quarter.

So why is the market surprised?  The company sales were mostly in-line at $3.1 Billion, a gain from 2005, but the -$0.09 EPS versus $0.06 estimates somehow managed to shock the street.  This is just an example of why any professor or why any market pundit thinking the market is actually “the efficient market” where the market knows how to instantly adapt to all known and unknown information is a theory full of more holes than the inventor of the ice pick.

One thing to remember that as Circuit City shares fall more and more: the company does have an implied “private equity bid” out there.  If you will recall the company received a private equity bid at $17.00 per share in cash from Highfields Capital Management LP back on February 11, 2005, back before private equity firms started buying everything under the sun.  Circuit City ultimately rejected the bid as inadequate.

This stock is now going on a Watch List for the “BAIT SHOP,” but we won’t be including it as an official name because including a stock into an “instant takeover candidate list” the same day there is atrocious news is historically not the right thing to do. So we’ll be keeping an eye on it for now.  You can bet what you are sitting down on that some firms are really looking at crunching numbers for this pig of an electronics retailer.

CC shares are now down 14% pre-market at $19.50.  The 52-week tradingrange WAS $21.99 to $31.54.  Yesterday’s market cap was $4.04 Billion.When Best Buy (BBY) fell last week the shares fell about 6% and are nowdown 20% from there if this pre-market level holds. 

Other laggard electronic retailers are RadioShack (RSH) and Tweeter (TWTR).  Two of the regional electronics and appliances sellers are Conn’s (CONN) and Rex Stores (RSC).

Jon C. Ogg
December 19, 2006

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