Short BEST BUY Stock - Research Paper Example

Investment Project: Short BEST BUY Stock. TABLE OF CONTENT NO. PAGE NO. 1. Summary………………………………………………………………………………………………………3 2 .Introduction………………………………………………………………………………………………….... 4 3. Short grid analysis…………………………………………………………………………………………….4 4. Valuation of the stock……………………………………………………................................................5 5. The management………………………………………………………………………………………….....6 6. The balance sheet…………………………………………………………………………………………….6 7. The fundamentals…………………………………………………………………………………………….7 8. Charts………………………………………………………………………………………………………….8 9. Conclusion………………………………………………………………………………………………….. 9 10. Recommendation……………………………………………………………………………………………10 11. Reference…………………………………………………………………………………………………… 11 Summary In summary, the investment project of the short BEST BUY stock is discussed, and recommendations made based on the short grid, the valuation of stock, the management, the sentiment on the balance sheet of the company, fundamentals and the chart. The fast paragraph of this paper on the investment project gives the introduction of what is to be done on the analysis of whether to invest short BEST BUY stock or not. It further shows how the company had been performing in the previous year’s, which leads the investors to make such recommendations as to sell the BEST BUY stock in the next one year. The second paragraph discusses the short grid of the company’s stock. It analyses the movement of the stock in the previous years, and further concludes that the BEST BUY stock had been decelerating and continues to predict that there will be further deceleration in the next coming years due to poor sales made during the holiday and its poor marketing strategies. The third paragraph discusses the valuation of the stock of the company. The company’s stock had been decelerating in the previous years and it further shows that will continue decelerating further in the next year and therefore the best decision is to short the BEST BUY stock. The fourth paragraph analyses the management ability which shows that the management had been arrogant in promoting the company’s products. They did not use the internet which most of its competitors used to sale to the customer; this resulted into poor sales and lowered the company’s revenue. The fifth paragraph discusses the sentiments based on the company’s balance sheet. The company’s balance sheet reveals that the assets of the company are inadequate to pay off the companies obligations, and this may put the company at a greater risk. The sixth paragraph analyses the fundamentals based on the company’s balance sheet. Lastly, it discusses the chart best on the EE charts of the Bloomberg and makes a conclusion to short BEST BUY STOCK. Introduction This report shows the discussions of the investment project of short BEST BUYs stock. The analysis discusses the reasons based on the short grid, valuation, management, fundamentals, sentiments and charts of the company. The investment on the short BEST BUY stock for the next year may be the best investment decision according to the analysis based on the streetwise-Bloomberg analyst recommendation function (ANR) and the earnings estimates (EE) charts. The company had good growth in the previous years, but due to unmet forecast on its holiday sales has changed the value of the company drastically within a very short period of time, which the investors must analyze to find out whether it is still worth investing in such accompany or to go short on its stock next year. These analyses are discussed in more, but precise detail as illustrated. Short grid This is the grid that shows how the stock of a given company has been accelerating or decelerating for a given period of time. To the BEST BUY stock, it has shown a greater decline or deceleration for the last holiday season, that is the late months of the year 2013. The consumer electronic retailer has been ranked number 5 according to the ANR of the Bloomberg function which indicates that it was of strong sell. So far in this year, 2014 the stock has fallen roughly by 30% and this further indicates that it may be worse in the future. Therefore, the best strategy for the investment is to short Buy Best stock so as to reduce more risk in the future. The price of its shares started decelerating when it never achieved it best sells in the long holidays. It was stronger earlier in the year when sales were stronger but of late it has been very weak and getting weaker each month due to poor sales of its products. The Valuation of the stock Year over year, BEST BUY has seen revenues shrink; this has negated its growth status. Last year its growth story diminishes as it was seen from its 2013 outstanding rise from $12 to $44 now has reduced to $24. This was due to the forecast of an increase in its sales during the holidays which never happen to be the actual outcome. This was due the already set strategy which made the company’s share price rise proved unsuccessful to the company. As a result, most investors started doubting the management’s capability to solve the market problems that made the companies sale reduce drastically. The dividend yield valuation of the firm reveals that in the year 2013 it was 1.8% that is $0.68/$37.50 and now in it is2.8%;$80.68/$24.50 and the valuation of the price earnings ratio as based on year estimates through January 2014 was 15.4*$37.50/$2.44 of the previous estimate, but now it is 12.6*$24.50/$1.95 the current estimate. These valuations are not as attractive as they seem. Although the dividend yield is high, it is not enough to provide support level. The price earnings ratio while looks lower it is of little use because it has turned to the next financial years earning. The EPS of the company for the previous years have been almost flat since the year 2008, but the stock has lost over 50% of its value on pure multiple compressions, and this indicates that there may be further compression of the stock next year. As according to Pinto et al (2010), a stock which shows continuous compression is not worth investing in. Therefore, the best recommendation is to short BEST BUY stock in the next one year. The management The management of the BEST BUY is arrogant as they set strategies to the company that they not certain of achieving. This has reduced the value of the firm has its share price reduces. Most investors in the company invested with the believe in the managements set objectives but when this turned out not to be actual outcome investors best decision in the company was to go short on the company’s shares. The management strategy stumbled, turning hoped-for sales and earnings growth into confirmed decline. The managements risk complementary was poor has it could not actively use other resources such as the online media to market its products effectively thus they can no longer compete in the age of powerful and lower price internet and discount store competition. Their commodities like the products, the digital age and changing consumer purchasing preferences have weakened their specialty stores importance and appeal. Further compounding the strategy is the company’s uncontrollable risk from the technological advancement. The new management style of cutting costs, closing some of its stores and refocusing its business strategy communicates a lot about the company’s future struggle to uplift its earnings and its stock value. Therefore to short BEST BUY stock is the most appropriate recommendation for the investment project in the next one year The Balance Sheet This shows the analysis of the company’s balance sheet to short BEST BUY STOCK. Although the debt for the company has a percentage of total capital, over the last year, this has decreased to 29.35%, which shows that it is still within the company’s norm even though there are no enough liquid assets to satisfy its current liabilities. The operating profit may prove to be more than adequate to service the debt. This concept of depending on the profit to service the debt when the assets are not enough to service such debts may put the company at a greater risk; hence, the best option is to short the company’s stock for the next one year until there are changes in its balance sheet. The balance sheet indicates the company is illiquid, and therefore, investing in such a company will result into huge losses to the investor if they do not sell their stock in that company in the next one year. The Fundamentals Fundamentals are the calculations that are produced by the financial analyst in the process of his or her analysis. For one to make good decision on whether to go short on the BEST BUY stocks according to its balance sheet the following fundamental analysis of the company are useful. They show numerical values that show on how the company has been performing for a given period of time. The company’s operations are measured in terms of qualitative data that it has recorded for a given period of time, from these data various fundamentals can be calculated to measure and or predict its performance in the next periods. Some of the most important fundamentals that are calculated from the balance sheet are as shown below. These values are used to predict whether investment in the company is viable or not in the next one year. Item value Total debt 1657 Dividend 0.62 Dividend yield 2.62 Receivable turnover ratio 37.32 Tangible book value 9.82 Working capital ratio 1.41 Total debt to equity 0.42 Tangible leverage ratio 2.89 Asset turnover ratio 3.00 Inventory turnover ratio 5.64 Charts Charts are important instruments for the financial analysts who would like to invest in a given companies stock. These charts have been used in the analysis of the BEST BUY stock to make justifications as to why such decisions are appropriate for the next one year. Earnings estimates have been used to illustrate the companies earning estimate in the next one year and to determine whether it is worth investing in such a company. The annual earnings estimates of the company for the next one year that is in 2015 shows that the earnings will be lower compared to the previous years. Therefore, there are high chances of losing some earnings and the capital invested in the next one year. It also shows that the revenue estimation will go down in the next one year. Due to the revenue reduction will lead to loss of income or earning to both the shareholder of the company and for the company itself. Therefore, the best decision is to short BEST BUY stock in the next one year to avoid loss of income in that year. Annual Earnings & Estimates - BEST BUY Conclusion In conclusion, the best investment decision is to short BEST BUY stock in the next one year. As illustrated by the Earning Estimates chart above, the company expects a reduction in its earning in the next year. Therefore, the best decision is to avoid loss of income in the next year by selling the Best Buy stock next year. As the revenue estimated will reduce so will be the earning, and this can result into a greater loss for the investor in the next year. The management should also improve and promote the company’s products through the internet so that it can increase its sales as most of the customers do their purchases through online stores. They should not continue being arrogant in promoting the products using the new technologies that are used by the other companies. This will give the company good competitive edge, and therefore, make increases in its revenue generation, which will grow its earnings and high stock value in the long run. Recommendation Evidently, from the analysis, the company recorded well growth in the previous years. However, unmet forecast on its holiday sales has changed the value of the company drastically within a very short period of time. As a result, the revenue reduction will lead to loss of income or earning to both the shareholder of the company and for the company itself. Therefore, the best decision is to short BEST BUY stock in the next one year to avoid loss of income in that year. Reference Pinto, Jared; Elaine, Henry; Thomas R. Robinson; John D. Slowe; Abby Cohen (2010). Equity Asset Valuation. Wiley: New York. Read More