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August 16, 2013

Stock of the Day

Recommendation: B-rated Buy

Welcome to the Stock of the Day for August 16, 2013. 2012 was not a good year for Best Buy Co. (BBY), which got slammed during the holiday season due to shipping errors. But now that the company has had some time to implement its new business model, let's revisit the blue and yellow big box chain and see if it can redeem itself this earnings season.

Company Overview: Spanning several continents, the Best Buy family of brands generates over $50 billion in sales per year! This is because in addition to its namesake stores, this company also covers Geek Squad, Napster, The Phone House, Future Shop, and several other major electronics retailer brands. The company is in the middle of shifting from a product-centric business model to a customer-centric model, so the Best Buy of today will likely be vastly different from what we see five or ten years from now.

Earnings Buzz: Best Buy is due to report second-quarter earnings before the opening bell on August 20. And at first shake, it doesn't appear to be good. The consensus analyst estimate calls for sales to retreat 13.7% and earnings to plunge nearly 58%. Ouch! But we have to remember that this is the same company that trounced analyst earnings estimates by 28% in the previous quarter. And looking beyond the second quarter, the picture becomes a whole lot brighter: Analysts are predicting that earnings will skyrocket 125% in the third quarter. That's nearly double the industry average. So only time will tell if Best Buy does in fact become a "best buy," but things are looking pretty good from where I'm standing.

Competition Breakdown:The Electronics Stores Industry is composed of five companies, including GameStop Corp. (GME), RadioShack Corp. (RSH) and HHGregg Inc. (HGG). Of these stores, Best Buy Co. has the highest market cap and dividend yield. However, in terms of long-term growth rate, this is a middle-of-the-road company, and its sales growth is the lowest in the industry. But that picture changes when you stack up BBY against its rivals in big box retail. On this front, Best Buy's main competitors are Inc. (AMZN), Apple Inc. (AAPL) and Wal-Mart Stores Inc. (WMT). Of these four stocks–each industry titans in their own right–BBY is the lone buy of the bunch. Apple Inc. and Wal-Mart are suffering from anemic sales growth while Inc.'s margins are getting squeezed. These fundamental issues, combined with a lack of buying pressure, put Best Buy Co.'s competition squarely in sell territory. Meanwhile, BBY is a buy for these reasons…

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. The past 12 months have brought a significant turnaround for this Moderately Aggressive stock; BBY has improved from an F-rated sell all the way to a B-rated buy. Interestingly enough, Best Buy still needs a lot of help in improving sales growth, operating margin growth and earnings growth. So Best Buy still receives a C for its Fundamental Grade. But what has really lifted this stock out of the doldrums is a resurgence in buying pressure. Apparently institutional investors like where Best Buy Co. is headed so the stock has surged 167% this year alone! This momentum has lifted BBY's Quantitative Grade to a B-rating.

Bottom Line: As of this posting, August 16, 2013, I consider BBY a B-rated (cautious) buy. While this upcoming earnings announcement may have some blemishes, if analyst estimates prove right Best Buy Co. could be headed towards a stunning third quarter and beyond.

Sound Off: What do you think about BBY? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook. For more stock grades and commentary, please visit!

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