Best Buy Is Still a Mess

In terms of financial jargon, being upgraded to neutral is an oxymoron equivalent that falls between jumbo shrimp and open secret.

Citi analyst Kate McShane is upgrading shares of Best Buy (NYS: BBY) today, but going from "sell" to "neutral" isn't exactly a ringing endorsement. Even McShane's new price target -- raised from $18 to $21 -- implies just 8% appreciation from yesterday's close.

A conspiracy theorist would argue that Citi's just trying to be polite, hoping to attract Best Buy's investment banking business. In reality, it's just an analyst that feels that the stock has gone as low as it can go -- for now.

Value investors may be tempted by Best Buy these days. The stock's trading at just five times adjusted earnings. The consumer electronics giant is still generating gobs of cash flow. Its nearest bricks-and-mortar rival was liquidated a couple of years ago. That Best Buy signage isn't lying. Right?

Well, not exactly. Best Buy is in the process of shrinking. Analysts see net sales shrinking this fiscal year and next year. The company's closing down dozens of its superstores, and opening smaller mobile-centric stores is a strategy that hasn't exactly worked for RadioShack (NYS: RSH) .

There's also the hairy issue of finding a new CEO after a saucy scandal that found both the chain's helmsman and its tightlipped founder on the way out. However, the inappropriate relationship is merely a distraction. It may create a situation where it's harder to a find a new CEO given flagging morale and an out-of-touch board, but Best Buy itself was on a downward spiral before Brian Dunn's ouster.

Best Buy's prices are too high, and its operating overhead is too chunky to change that. If price cuts are offset by a more aggressive push to market high-margin services and insurances that most customers don't want or need, the already iffy shopping experience is going to get even worse.

No one sees (NAS: AMZN) slipping on the top line. Analysts see revenue soaring 31% this year and 29% come 2013. Smaller rival hhgregg (NYS: HGG) is looking at roughly 10% top-line growth over each of the next two years.

The rub is that Best Buy can't play those games. It can never match Amazon's lean showroom-free pricing advantage. If it follows hhgregg by emphasizing big-ticket appliances and gadgets, it loses the repeat business on small-ticket media purchases. And, unless you've been living under a shuttered Circuit City for the past few years, you have to realize that physical media in all forms is being replaced by digital delivery.

Banking on a Best Buy turnaround is a risky bet. The only wager worth making here is on how slowly or quickly it works its way through the downward spiral. There may be times when the share price falls too much too soon -- as we've seen in recent months -- but trying to pick a spot to nab a small uptick and time your exit before the next step down is dangerous.

That's not investing. That's gambling in a game where the odds are stacked against you.

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS six months ago. The call is beating the market so far -- because Best Buy is not. If you want to play nice with the trends that will pay off in the future, forget Best Buy and start reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.

At the time thisarticle was published Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of RadioShack,, and Best Buy.Motley Fool newsletter serviceshave recommended buying shares of hhgregg and The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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