This Best Buy Stock Analyst Downgrade Hurts

By Markets Fool.com

Image source: The Motley Fool.

Continue Reading Below

We're now just a couple of weeks away from the start of the holiday shopping season, but at least one Wall Street pro is suggesting thatBest Buy (NYSE: BBY)may not be the "best buy" for investors. Evercore ISI analyst Greg Melich downgraded shares of the leading consumer electronics retailer on Tuesday, taking his rating from Hold to Sell.

Melich is concerned about trends at both the industry- and Best Buy-specific levels. When it comes to the state of consumer electronics retailers in general, Melich sees near-term challenges as smartphones reach saturation levels in the U.S. market and price wars have commoditized 4K televisions. At the Best Buy level, Melich sees discounters, warehouse clubs, and online retailers taking market share as customers flock to the lowest prices.

Amazon.com (NASDAQ: AMZN) is now the country's second largest consumer electronics retailer, and it's obviously growing faster than Best Buy. This doesn't necessarily mean that Amazon is the better stock. Best Buy is the one packing the 2.9% yield. We are several years away from when Amazon begins shelling out quarterly dividend checks. Best Buy is the one with the reasonable trailing earnings multiple of 13, pitted against the online juggernaut with its triple-digit multiple. However, the analyst downgrade is based on the fundamentals of the entire industry but just the valuation of one stock, Best Buy.

Blue Christmas for blue and yellow

Best Buy isn't immune to e-tail.Domestic online sales soared 24% for Best Buy in its latest quarter, rising to account for 10.6% of its stateside sales. However, those online transactions have come mostly at its own expense. Enterprise revenue growth at Best Buy was flat at $8.53 billion. Comps did rise 0.8% during the quarter, but it does include internet sales that are divided into the existing physical store base.

Continue Reading Below

The worst thing about the Evercore ISI downgrade is the timing. It's probably not a coincidence that Melich is changing his stance now with the start of the telltale holiday shopping season looming later this month.

This should've been a decent season for brick-and-mortar chains. The smartphone saturation and TV commoditization arguments are valid, but there are also new gaming consoles and virtual reality platforms. SunTrust analyst David Magee boosted his price target on the stock this summer, arguing that an emphasis on big-ticket appliance sales will also work in Best Buy's favor.

We'll get a better glimpse on Best Buy's reality later this month when it reports financial results for its fiscal third quarter. It proved naysayers wrong last time out, with its stock soaring after blowout results that topped expectations on both ends of the income statement. Naturally the seasonally potent holiday quarter is the big one. The guidance that Best Buy offers later this month will be critical. However, if an analyst is so set on changing his tune ahead of concrete news out of Best Buy it has to be at least a little bit troublesome.

10 stocks we like better than Best Buy
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Best Buy wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.