Somewhere along the line investors decided to enjoy complete perversion of the value investing mantra. At some point, someone decided that any company selling for dirt cheap was a “value investment.”
This kind of thinking is fundamentally flawed, and its prominence is one of the many reasons why investors shy away from active portfolio management.
No Lingering Value
Value investors don’t want cheap. I mean, we want cheap, but it’s not the only thing that governs a portfolio. As a value investor, I want to beat the risk-free rate on US Treasuries handily while accepting the same amount of risk. That is to say that value investors want to buy companies that can generate returns greater than US Treasury bonds while being just as safe.
Few companies are as safe as US Treasury securities, which pay out as long as the lights are on. That doesn’t mean they don’t exist. But let’s stick to Best Buy and talk about why the company offers absolutely zero safety to investors in the common equity.
Best Buy does not have:
- A moat – There is nothing that gives Best Buy a competitive advantage over competitors like Amazon.
- Pricing Power – Prices for most electronics are set by the manufacturer, and retailers are allowed to diverge only slightly from set pricing.
- Unique products – There is nothing inherently different from a Microsoft Webcam for $25 at Amazon and $30 at Best Buy.
- A brand worth a hoot – People over 50 (people who would actually buy an electronic product offline) hate Best Buy and their annoying sales clerks.
- A brand worth a hoot pt. 2 – Best Buy destroyed their brand name with people under 50 with Geek Squad. Steve Jobs would call this sales force disguised as a computer repair service a “brand withdraw” from the “brand bank account.” (See an epic YouTube video of Steve Jobs on branding.)
Price vs. Value
Value investors are people who want long run returns greater than the risks of a particular investment. More importantly, value investors want to never lose. Value investors realize that if you never lose, you never need big, massive winners to outperform.
This is part of holding a company forever. The best companies are those that stand the test of time, and Best Buy is not one of them. Best Buy could, for a long time, make billions of dollars because it was the middleman between distributor and customer. Today it’s the most expensive of these middlemen, and consumers are price sensitive.
The internet has and will continue to kill the big box store model. So far, only the nerdiest of retailing companies have experienced the internet effect. But that’s just the starting point. Every other big box retailer will have to make a go of smaller stores (Best Buy’s preferred way to “save face”) before ultimately giving up to online retail.
Best Buy’s heyday is over. And it’s not a value investment.