Best Buy Is a 'Buy,' Say Einhorn, Credit Suisse

BOSTON (TheStreet) -- Value investor David Einhorn, who runs hedge fund Greenlight Capital, disclosed a position in out-of-favor electronics retailer Best Buy (BBY) in his latest quarterly letter, ahead of his firm's official 13-F filing. Best Buy's stock has fallen 30% in 12 months, underperforming U.S. stock indices. Einhorn's pick merits investors' attention.

Best Buy has fallen 8.9% this year, and Einhorn, who established his position at an average price of $33.33, is in the red on this bet. Still, he makes a compelling argument for the down-but-not-out security. Of note: Greenlight's long-run annualized return since 1996 is close to 25%. It ranks as one of the best-performing U.S. hedge funds, despite a focus on mainly domestic equities. Also, unlike its peers, Greenlight has a small staff and rarely trades. Its operations are focused on researching and then owning, or shorting, stocks, not vacillating on its investments, as many firms do.

In his quarterly letter, Einhorn stressed that investors are far too concerned that Best Buy has reached its growth limit and will suffer declining sales in the future. In particular, he views Best Buy's holiday dip as a fleeting issue rather than a signal of looming obsolescence. In essence, Einhorn is making a bet against online shopping for electronics. He sees Best Buy offering customer value through "store help, merchandising, service and being able to walk out of the store with your purchase." The challenge of seeking a refund or repair for an Internet-purchased high-ticket item, such as a 3D television, illustrates Einhorn's point. Internet shopping may dominate for low-ticket, easily replaceable items, but brick-and-mortar will likely retain a lock on expensive goods.

Despite such security, Best Buy will face indisputable headwinds as its U.S. business matures in coming years and it fine-tunes its combination sales strategy, offering products through both its Web site and retail outlets. Einhorn concedes that square footage will drop by a couple percent a year. Still, he is encouraged by the Best Buy Mobile concept. Though rarely discussed, Best Buy is among the world's largest retailers of cellular phones, offering models from all major carriers, at stores and stand-alone mall kiosks. It was the first third-party retailer to start selling the Apple (AAPL) iPhone and iPad. Einhorn is also optimistic about Best Buy's international prospects, going forward.

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