Best Buy’s feeling the earnings pinch
In a “difficult economic environment,” Best Buy (NYSE: BBY) reported third-quarter earnings down a whopping 77 percent, though revenue rose 15.8 percent to $11.5 billion. Gross profit margin increased to 24.9 percent of revenue, and market share advanced by 1.7 percent.
In this tough environment, the company is offering voluntary severance packages to employees, with involuntary layoffs possible later, if needed. In addition, Best Buy plans to slash its capital spending by 50 percent next year. As part of that plan, it will slow the pace of new store openings in the U.S., Canada and China. Cutting spending in response to cowering consumers and shrinking demand seems like a must for smart companies right now.
The company stands to benefit from the bankruptcy of competitor Circuit City, but it’s also competing with Wal-Mart, which has been slashing prices on its electronics offerings. Meanwhile, Best Buy is expanding its digital music business by buying Napster.
Trading at just nine times earnings, Best Buy is best in its class and tempting at recent prices. Still, shareholders might want to steel themselves for some rocky times in the short term. (The Fool owns shares of Best Buy.)
Ask the Fool
Q: OK, the market goes up and down because of the buying and selling of stocks. But exactly who’s doing all the buying and selling? – T.K., Akron, Ohio
A: Many buyers and sellers are individual investors like us, placing small trade orders through our brokerages. Then there are the institutional investors, such as mutual funds, pension funds, banks and insurance companies. These big guns can account for two-thirds of the activity in the market on a given day.
Stock prices fluctuate due to supply and demand. If a stock is in great demand, its price will rise. If it falls out of favor, there will be lots of sellers, and the price will keep falling until it hits levels at which others will buy.
One way small investors have an advantage over big investors is that they can discover a small gem and invest in it early. When institutions eventually start buying (they often can’t get too involved with very small companies), they’ll drive its price up, benefiting the smaller, earlier investors.
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My dumbest investment
I have had several dumb buys. My most recent was trading on a rumor about a big financial company. When news broke that a deal was going down in which banks were going to buy up shares of the firm, I bought 100 shares. When the dust settled and the deal was done, I had lost $3 per share and the stock was still falling fast. At one point, I was down 34 percent in one week. It was a good learning experience. Don’t trade on rumors. Just buy solid companies and hang in there. – F.L., online
The Fool responds: We agree. Remember that there is always a chance that a rumor has been started by someone who stands to gain from actions people will take in response to it, whether it’s true or not. This is especially true with penny stocks, whose prices can be relatively easily manipulated. Even when a rumor is true, it may not pan out. Two companies may be discussing merging, for example, but they may ultimately decide against it.