January 6, 2013 in Business

Despite positive developments, Best Buy still comes with risks

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Associated Press photo

A Best Buy worker assists a customer at a store in Mountain View, Calif., in 2011.
(Full-size photo)

Shares of electronics retailer Best Buy (NYSE: BBY) have fallen by more than 40 percent over the past year, leaving some wondering whether it’s a bargain now. Well, opinions are divided.

There are good reasons to steer clear, such as the fact that you can find other compelling investments with less murky futures. You might also question the company’s leaders, as they have rejected founder Dick Schulze’s attempts to buy the company, though a recent agreement leaves room for that to still happen, most likely at a far lower price.

Another concern is competition from formidable Amazon.com, not to mention Wal-Mart and others. The company has offered to match the prices of its online competitors, but that doesn’t bode well, considering that its overhead costs are much higher.

On the other hand, Best Buy has a new CEO in French turnaround expert Hubert Joly. And despite its troubles, it generates hundreds of millions of dollars in free cash flow annually.

Meanwhile, the ability of many online retailers to not charge sales taxes may go away as some laws get changed. And despite the convenience of online shopping, many consumers still want to examine products in person before buying.

There’s an upside here, but big risks, too. (The Motley Fool owns shares of Amazon and Best Buy and its newsletters have recommended Amazon.)

Ask the Fool

Q: What’s “market share”? – E.M., Victoria, Texas

A: The useful online glossary at investorwords.com provides a good definition: “The percentage of the total sales of a given type of product or service that are attributable to a given company.”

Consider smartphone operating systems, for example. According to Kantar Worldpanel ComTech, in the United States, Apple’s iOS recently held a 53 percent share of the market (up from 36 percent a year ago), vs. 42 percent for Android, 3 percent for Windows and less than 2 percent for BlackBerry OS. Recent global data from IDC for “smart” connected devices (which include smartphones, PCs and tablets) has Samsung with 22 percent share, followed by Apple at 15 percent, Lenovo at 7 percent, HP at 5 percent and Sony at 4 percent. (The Fool owns shares of Apple.)

When assessing a company’s market share, it’s important to look at growth rates, too, along with profitability and the sustainability of those growth rates. Checking out current market share and market-share trends can be useful when researching a company or an industry.

Q: I want to open a brokerage account, but the brokerages I’ve looked at require initial investments of between $1,000 and $5,000. What can I do? – R.W., Lexington, Ky.

A: Keep looking. Some brokerages don’t have minimums. Others have modest ones. Scottrade and E-Trade, for example, require just $500 for some accounts. Learn about and compare brokerages online at brokerage-accounts. findthebest.com and broker.fool.com.

Note that commissions at many brokerages are now as low as $5 or $10 per trade, down from $30 to $50 a few years ago, and far better than the hundreds of dollars that some full-service brokerages will still charge you today.

My dumbest investment

This is probably not the dumbest thing I’ll ever do, since I have plenty of life left, but earlier this year I sold my Wal-Mart stock on someone’s recommendation. There was this scandal in Mexico, and all of a sudden the thinking on the stock went from buy to sell. Of course, a huge company like Wal-Mart isn’t going to collapse on a little political thing, and here it is, a few months later, selling for a lot more than it was when I sold it. – J.S., Burlington, Conn.

The Fool responds: This past spring, Wal-Mart was hit with allegations of spending millions on bribery in Mexico. In November, the company disclosed that its internal investigation was looking into bribery cases in Brazil, China and India, along with Mexico. It’s not good news, but it’s not likely to shut the company down, either, especially if the company is seen as dealing well with the problem.

When a company you own encounters trouble, determine whether it’s a short-term, addressable problem, or a truly vexing long-term problem. Sell on the latter and consider hanging on with the former.

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