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Don't let short-term issues triggers your alarm bells
February 4th, 2014 

We have finished the first month of 2014 and the markets have cooled off a little.

Now, please don't get all in a panic and think the big sell-off is coming, because it is not. Businesses are doing well, the economy is moving forward and valuations are still reasonable on many companies.

One thing that can be hard is when investors see the Dow or the S&P 500 climbing and become discouraged because their own account is flat or falling.

They may think they need to switch to something different to beat the markets. I would recommend taking a deep breath, stepping back and looking at what you're doing in your own portfolio.

How has your portfolio done over the last two to five years? Have you changed your way of investing?

As many of you may know, I've been managing money for more than 30 years and have learned that using fundamental analysis has worked well for investing. There are times where my portfolio will lag the markets. I don't pack it in and say, "I'd better do something different." I understand that the companies that I hold in my portfolio may be having some short-term issues and are lagging the markets.

But I also understand that the short-term problems have been looked at and are simply that: short-term problems. The longer-term performance will reflect the strength of the fundamentals.

Electronic retailer Best Buy (NYSE: BBY) has seen better days recently. The stock fell off the cliff about two weeks ago after stumbling along since the first of the year, having hit a high of nearly $45 back in November.

To be fair, it is worth noting that the stock was as low as $13.83 one year ago. Best Buy is headquartered in Richfield, Minn., where it employs 165,000 nationwide. It has a market cap of $8.2 billion and pays a 2.7 percent dividend.

Best Buy has cash and short-term investments of $2.2 billion thanks in part to a healthy cash flow from operations of $324 million, which is far better than the 2013 Q3 of only $81 million. It is also worth noting that last year, the company was a little light on cash, having only $309 million.

Assets are down by about $600 million but liabilities fell by nearly $3 billion, with a big chunk of that coming from a falling accounts payable of $1.5 billion. The debt to equity is currently 44.6 percent, which is above the industry average of 26.6 percent but still very reasonable. Best Buy has paid down more than $300 million in debt over the last year and yet its cash has multiplied.

While the stock has declined by roughly 50 percent, the earnings-per-share estimates for the year ending January 2015 having only fallen by 19 percent over the last 90 days to $2.20 per share.

Best Buy will report earnings February 26 for the fiscal year ending January 2014; the expectation is EPs of $1.84.

We will see if it makes this number, but what interests me is that the mean of 27 analysts are looking for EPS to increase by 21 percent to the estimated $2.20 for fiscal year ending January 2015.

The $2.20 forward-earnings-per-share estimate has seemed to stabilize at the $2.20 level, and using a multiple of 16.5 would equal a target sell price of $36.30 over a 50 percent gain from current levels not including the nearly 3 percent dividend.

I also have in the back of my mind that when the company reports Feb. 26, we will then get a look at what is expected for January 2016 EPS, and anything above a $2.20 EPS will raise the target price. It is also worth noting that the forward PE is currently very attractive at 10.9.

I know some people are worried that perhaps more consumers will buy their electronics from Amazon or somewhere else on the Internet. I'm not so sure on that since electronics change so much and, in my opinion, are more -hands-on and have to be played with, and I think no one does this better then Best Buy.

Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com

Do you have a question or a company you'd like us  to take a look at?
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