Is Best Buy’s Comeback For Real?

Best Buy's (NYSE:BBY) stock price has more than doubled since hitting a low of $11.20 in December. The stock has quickly become a darling of Wall Street: Its charismatic new CEO, Hubert Joly, has fueled recent investor optimism. But with the highly competitive dynamic of the consumer electronics retail space and mixed reviews out on Best Buy's first-quarter earnings report, does the stock justify its impressive price climb? Let's use our CHEAT SHEET investing framework to decide whether Best Buy is an OUTPERFORM, WAIT AND SEE, or STAY AWAY?

C = Catalysts for the Stock's Movement

The biggest catalyst for Best Buy's historic price climb has been the marriage between Wall Street analysts and newly appointed Joly. Despite intense competition in the consumer electronics retail industry, Best Buy has outlined a restructuring effort, known as "Renew Blue," which is streamlining its operations by selling off its European division, cutting costs, and introducing a price-matching initiative. So far, the company has seen little material results on this program but investors and analysts are optimistic.

E = Excellent Performance Relative to Peers?

Best Buy is actually trading at a reasonable forward price-to-earnings multiple relative to its main competitors, Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), and Costco (NASDAQ:COST). A potential reason for this may be because Best Buy does not have high growth potential. On the other hand, the company could still have more room to go up in price and is undervalued at the moment. Currently, Best Buy enjoys a healthy return on assets percentage and operating margin — even though this margin has declined due to its recent price cutting initiative.

	BBY	WMT	COST	AMZN
Forward P/E	12.41	12.85	21.96	88.76
Operating Margin	2.15%	5.93%	2.91%	1.04%
ROA	4.62%	8.73%	6.59%	1.71%

E = Earnings and Revenues Are Decreasing

To investors who have bought in to Best Buy, the following table should serve as a caveat: The company has not shown year-over-year growth earnings in the past five quarters. Best Buy reported a 1.3 percent decline in comparable store sales in the first quarter of fiscal year 2014. Management attributed the average performance last quarter to the shift in the Super Bowl holiday and to fewer major product launches. Additionally, it wrote down a $200-million loss for its European division and should benefit from having that off the balance sheet in future quarters. A bright spot in its earnings was online sales growth, which increased 16 percent during the quarter. Joly has made good on his cost-cutting promise, but there is certainly a trend in negative year-over-year earnings growth.

	2014 Q1	2013 Q4	2013 Q3	2013 Q2	2013 Q1
Qtrly. EPS YoY Growth	-88.57%	-71.46%	-22.22%	-21.67%	-2.78%
Qtrly. Revenue YoY Growth	-19.21%	38.12%	-5.23%	-3.59%	-26.20%

*All data sourced from YCharts.

T = Technicals Are Strong

Best Buy is currently trading at $29.42, above both its 200-day moving average of $20.96 and its 50-day moving average of $27.14. Best Buy has experienced a definitive uptrend since the beginning of the calendar year. The stock is trading right around its 52-week high of $29.91. The last time Best Buy traded at this price? Two years ago, in July 2011. The aftermath was a sharp correction downward followed by a one-and-a-half year downtrend. If the stock's growth is truly driven by fundamentals, rather than speculation, it should not suffer the same fate.

Conclusion

While Best Buy has enjoyed an impressive run over the past six months, there is just not enough solid financial performance to buy the stock right now — especially since it is trading right at its 52-week high. It will probably take a few more quarters of mixed earnings reports for Best Buy to really establish a solid strategy. CEO Joly certainly has a strong vision for the future of the company, and he's the right man for the job to steer the company in the right direction — but the consumer electronics retail space is just too competitive right now. Best Buy is a WAIT AND SEE.