March Madness Special: 2 Underdog Stocks Looking to Upset Analysts Next Quarter
The rally since the stock market bottomed out four years ago has been nothing short of ferocious and phenomenal. There are quite a few companies that have returned greater than 1,000% since the bottom. Conversely, a handful of formerly great brand-name companies that hit rock-bottom have yet to truly recover.
In the spirit of NCAA March Madness and broken brackets everywhere (including mine), I propose to examine two large business models that look to be on the mend and could very easily upset a majority of analysts by reporting a big upside profit surprise next quarter.
Some analysts have proudly proclaimed the death of big-box retailing and used the dissolution of Circuit City as evidence that the large-scale electronics store simply couldn't survive. With Best Buy's sales in the doldrums and shoppers admitting to using Best Buy's showrooms as show-and-tell forums while purchasing items on Amazon.com for less at a later time, there was a period where these analysts appeared to hit the nail on the head. Poor leadership had failed to see a rapid push toward mobile devices and cost-consciousness, and it cost Best Buy severely.
However, new CEO Hubert Joly, who is a specialist at turning around aching businesses, has developed the perfect plan to right the ship.
The most dramatic departure from Best Buy's previous pricing strategy is that it plans to match prices -- including online prices -- in an effort to stop "showrooming." Forbes called the action a "late salvo," but I feel it's the perfect time to go after Amazon. You see, Amazon is beginning to feel the effects of having various states around the U.S. requiring it to collect sales tax. One of its biggest advantages had been its ability to subvert state taxation, which made its products appear noticeably cheaper. With California and Pennsylvania starting to collect tax last September, and New Jersey, Virginia, Indiana, Nevada, Tennessee, and South Carolina set to be added to the list between 2013 and 2016, Amazon is seeing its comparative advantage slowly slip away. Thus, it makes complete sense for Best Buy, now, to step up and match Amazon's prices to give the customer both the convenience of trying out its various products and the ability to purchase knowing they're getting the best price.
A focus on mobile products and a slimming down of its store size are other key components to the turnaround campaign. Joly understands that mobile devices (e.g., smartphones and tablets) are what's driving consumers into the stores, not just televisions and appliances anymore. With a focus on the right phones and tablets, Best Buy will have won half the battle, getting the customer into the store.
For the other half of that battle, Best Buy will be offering incentives to its sales associates (a marked difference from years past) to make sales, which should ultimately help drive customer service and provide the differentiation factor that customers simply can't get from the Internet or Amazon.com. Joly also wants to focus on putting his top sales performers in weekend time slots, where traffic is at its highest.
So far, the results are working much better than anyone had anticipated. Best Buy's fourth-quarter report, released in early March, delivered 0.9% same-store-sales growth (reversing a long contraction) and showed that Best Buy, too, can be a prime online destination, with online revenue growing 11%. If you're looking for a big upset next quarter, bet on a big resurgence from Best Buy.
This is like a two-for-one, because Amazon.com and other online retailers are the prime culprit for Staples' woes as well. Staples, the world's largest office-supply chain, has struggled with increased price competition online, as well as slow growth domestically and in Europe among small businesses, which are its bread-and-butter enterprise customers.
But like Best Buy, Staples has a plan to revitalize its business model, and it's getting a nice boost from its next two largest competitors, Office Depot and OfficeMax .
Similar to Best Buy, the Staples turnaround begins with a downsizing effort aimed at reducing its square footage in North America by 15% by 2015. The move is targeted at improving efficiency by maximizing square footage and focusing its efforts on smaller stores that are easier for customers to navigate.
Likewise, Staples will also be complementing its traditional office-supply products with smartphones and tablets that have proved to be big drivers of foot traffic. The really exciting news on this front was the announcement that it'll carry Apple accessories in its stores. The Apple name alone should singlehandedly boost traffic. Rumor has it as well, from the aptly named website MacRumors, that Staples may also begin carrying the iPhone, iPad, and Mac, which would be an even bigger boost to its traffic. I mean, have you ever walked by an empty Apple Store -- other than after the mall is closed? I highly doubt it!
Another aspect of Staples' plan involves promoting its online offerings. Staples isn't light-years behind Amazon when it comes to office-supply sales, so continued focus on customer service, supply-chain efficiency, and pricing could establish Staples as the No. 1 online retailer of office-supply products in no time.
That bonus I mentioned that could make Staples a Wall Street spoiler for multiple quarters in a row is the pending buyout of OfficeMax by Office Depot. This merger out of weakness was a necessity, but it could do more harm than good for the two companies over the next two years. As Office Depot and OfficeMax combine their companies, store closures and merger-related "hiccups" are bound to occur. These closures provide Staples with an immediate chance to pick up displaced consumers and woo them permanently away from Office Depot or OfficeMax.
All told, the Street's expectations on Staples aren't very encouraging. However, given the circumstances I've mentioned, Staples has all of the tools necessary to orchestrate an amazing turnaround that is bound to catch analysts off guard.
Do you have an "upset" stock that you think could take Wall Street to the cleaners in the upcoming quarter? If so, let's hear about it in the comments section below!
Can the Best Buy revival continue?
The battle between bricks-and-mortar companies and e-commerce wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.
The article March Madness Special: 2 Underdog Stocks Looking to Upset Analysts Next Quarter originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Amazon.com, Apple, and Staples and recommends Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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