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Baby Best Buy Undergoing Growth Spurt

BOSTON ( TheStreet) -- In addition to going by an unpretentious, lower-case name, hhgregg (HGG) is a fast-growing electronics retailer, like the Best Buy (BBY - Get Report) of the South.

Since 2007, hhgregg has increased sales an astounding 88% annually and boosted net income 141% a year. Its stock returned 23% a year over that span, beating the S&P 500 by a wide margin.

Founded in Indianapolis in 1955, hhgregg's inaugural store sold washing machines, dryers, refrigerators and grills. Soon after, it expanded its line-up to black-and-white and color televisions. Its hallmark was, and still is, outstanding customer service, which helps explain the success of its recent expansion even with the lingering effects of a severe recession. A 110% low-price guarantee ensures that hhgregg's customers are getting the most bang for their buck.

Despite a recent run, this small-cap retail stock is still a solid investment, especially as we head into holiday shopping season. Fiscal first-quarter net income increased 85% to $2.7 million as earnings per share rose 75% to 7 cents, restrained by a higher share count. The downside to hhgregg's low-price strategy, like that of Wal-Mart (WMT - Get Report), is thin margins. The quarterly gross margin remained at 30% and the operating margin hovered in shallow territory at 1.3%. Low spreads reflect dirt-cheap prices, assuring customer growth in a consumer-challenged economy. The national unemployment rate is stuck at 9.6%.

Despite a market value of just $1 billion, hhgregg has attracted an enthusiastic Wall Street following. Of analysts covering its stock, 12 rate it "buy," seven rate it "hold" and just one ranks it "sell." A median price target of $30.30 suggests a return of 27% in the next 12 months.

Some analysts see greater upside. Small-cap-focused Sidoti & Co. offers a target of $37, suggesting the stock will gain 55%. KeyBank (KEY) and Barclays (BCS) expect a rise of 47% to $35. And Credit Suisse (CS) predicts that hhgregg's stock will climb 34% to $32.

It isn't all accolades from sell-side researchers. Piper Jaffray (PJC) downgraded hhgregg to "neutral" yesterday and cut its target to $23, implying the stock is overvalued. Shares tumbled 5.7% as indices rallied almost 1%. hhgregg still has notable short interest, with 27% of its float sold short. By comparison, Bloomberg clocks average short interest for the computer and electronics retail industry at 4.8% and average short interest for the home improvement retail industry at 1.9%. So, plenty of traders are betting on a pullback in hhgregg's stock.

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