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Random Musings: Retail, REITs, BlackBerry, and More

publication date: Jun 26, 2017
author/source: Brian Nelson, CFA

Image shown: Best Buy's resiliency in the face of competition from Amazon.

Let’s cover some recent news.

By Brian Nelson, CFA

The markets have been relatively flattish the past week or so, but that may not mean much. They could still be digesting some of the big gains thus far in 2017 before potentially staging their next move. At the close June 26, the SPDR S&P 500 Trust ETF (SPY), a proxy for the S&P 500 stood at $243.29. For some reason, I felt it important to make note of this level, as if it were an important one. Things have been very quiet for a long time now, and I get the feeling that an inflection point may be coming soon, the calm before the storm, as it is often said. Nobody truly knows.

Let’s cover some news. First, retail stock prices (XRT) seem to be recovering a bit after Amazon’s (AMZN) proposed purchase of Whole Foods (WFM), perhaps on the view that the market may have overreacted to the e-commerce giant’s proposed entrance into the grocery market. Newsletter portfolio holding CVS Health (CVS) nudged back over $80 on the session June 26, and we continue to watch its equity price closely (it has been basing since the end of 2017). We liked the move today in its shares, even if many are ruling out another bid for Whole Foods’ assets, the outcome of which we think would result in a winner’s curse, where the winning bidder would surely end up paying too much. If you missed the news on Amazon’s proposal to buy Whole Foods, read more, “Amazon To Buy Whole Foods: Not Creative Destruction, Just Destruction (June 16).”

Second, I wanted to bring your attention to the pricing activity of Best Buy (BBY). The company was left for dead near the end of 2013, almost trading for $10 per share, but believe it or not, the electronics retailing big box giant’s shares set a new all-time high a couple weeks ago and have been pulling in a bit to close its gap up after earnings. We highlight Best Buy not because we think its shares are cheap (in fact, we think they are bumping up against the high end of the fair value range), but instead as a reminder that some retailers not only can survive against the onslaught from Amazon, but they also can potentially thrive. CEO of Best Buy Hubert Joly had a lot of positive things to say about its most recent quarter, results released May 22:

We grew our Enterprise comparable sales by 1.6% during the quarter, driven by growth in both the Domestic and International segments. We also continued to drive significant growth in the online channel – with Domestic online comparable sales increasing 22.5%. On the profitability side, at the Enterprise level, we continued to optimize merchandise margins and exercise good expense management...For the full year, which as a reminder has an extra week, we are updating our topline guidance to reflect the better-than-expected first quarter results and our second quarter guidance. We are now expecting revenue growth of approximately 2.5% versus our original guidance of approximately 1.5%...we are expecting full year non-GAAP operating income growth of 3.5% to 8.5% versus our original guidance of 1% to 3% growth.

On the other hand, GameStop (GME) faces a plethora of concerns that we think have only been reignited recently. In its first-quarter results press release, issued May 25, the company noted that it expects comparable store sales to be in the range of flat to down 5% for the year, but most importantly, it reminded readers that it will “no longer (be) providing quarterly EPS or same store sales guidance," a big red flag, as visibility in its business starts to fade. GameStop’s financials are healthy as can be, but “the biggest long-term threat…will eventually be digital delivery of games,” something that we think is an inevitability. On June 19, for example, Hasbro (HAS) launched its first subscription service for games, and if Sony (SNE), Microsoft (MSFT), and Nintendo (NTDOY) cut GameStop out of the industry value pie, shareholders could be in for some even tougher sledding. Shares of GameStop closed at ~$21 on June 26, down from over $30 per share during the summer months of last year.

The Oracle of Omaha Warren Buffett has been on the move recently with Berkshire Hathaway (BRK.A, BRK.B) taking a stake in STORE Capital (STOR). According to the report, STORE Capital “issued 18.6 million shares of company stock in a private placement to wholly-owned subsidiary of Berkshire Hathaway at a price of $20.25 per share.” The REIT derives its name from its investing and managing Single Tenant Operational Real Estate. For those interested in learning more about STORE Capital, you can download its fact sheet here. As the 10-year Treasury yield (TBT, TLT) continues to decline (now at the lowest levels of the year), interest-rate sensitive stocks have been getting a bid. Though bouncing on the news, our favorite REIT, Realty Income (O) continues to hover in the mid-$50s per share, down from the highs set in mid-2016 near $70.

I also wanted to report a couple interesting developments. CA Inc’s (CA) shares traded toward our fair value estimate June 21 on buyout rumors that it is in “early deal talks” with BMC. We value the company’s shares at $40 each, but we’re awaiting further news regarding the confirmation of any transaction. Shares initially reached $36 but since have fallen to under $35. That same day, June 21, news hit the wires that Staples is in late-stage talks with Sycamore Partners to be acquired by the company. Some have noted a $10 price tag may make sense, but we value shares just north of that. Both CA and Staples (SPLS) are trading within their respective fair value ranges at the time of this writing. Last but not least, BlackBerry’s (BBRY) shares are worth putting on your radar. The company’s shares traded off after a disappointing first quarter release June 23, but free cash flow generation in the quarter was solid. We still prefer Apple (AAPL), but BlackBerry's financials offer considerable fundamental option value for it to sustainably turn things around, in our view. We're keeping watch.

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