One of our colleagues recently asked about Circuit City(CC) - Get Report and the consumer electronics sector. Consumer electronics appears to be on many investors' minds, especially the major retailers: Circuit City, Best Buy(BBY) - Get Report and RadioShack (RSH) .

TheStreet.com Ratings stock model rates Best Buy a buy. Factors to consider here include consistent 13%-15% top-line growth over the last three years and improving operating margins with a product range that includes high-margin home theaters and video games. Another positive, though more long term, is the 51% stake it acquired two months ago in Jiangsu Five Star, the fourth-largest Chinese retailer of appliances.

Best Buy's performance has been solid, with a low 10% debt-to-capital ratio and high 10% return on assets, while the overall return on equity profitability has remained in the 20%-25% range. Despite these healthy numbers, the market performance has been anemic. The stock is down 8% off its April 7 high of $59.50 on concerns of a consumer spending slowdown. The earnings conference call is scheduled for Tuesday.

Circuit City also comes in as a buy, but less aggressively so. Revenue has been red-hot at 18% year-over-year growth in the last quarter, vs. a peer average of 11%. As with most retailers in this category, the fourth quarter makes the difference here. At CC, this becomes especially critical because it basically breaks even during the other quarters or runs at a slight loss until the year-end holiday season. The earnings conference call is scheduled for Sept 20.

Finally, our stock model is lukewarm on RadioShack with a hold rating. The company gets credit for its past track record of above-average profitability, but recent reported losses have dragged the stock down to the $17 to $18 per share, half of its $34 high within the last 16 months. While the stock has bounced off a $14 low, concerns about slow revenue growth and a 50% debt capital structure remain. RadioShack has scheduled an Oct. 20 conference call.

It is important to validate the stock model ratings against industry trends and management views, especially at potential inflection points where business data may turn negative or slow.

The longer-term outlook for the consumer electronics industry is very positive. According to the Consumer Electronics Association, video continues to be one of the hottest product categories, with total revenue exceeding $21 billion in 2005, fueled by the transition to high-definition television (HDTV) and the public's fascination with new digital display technologies.

In mid-October, the industry meets in California to discuss new trends and technologies and to hear forecasts for sales. A month later, on Nov. 8 in New York, consumers will get a sneak peek at this year's hottest products two months before the 2007 International Consumer Electronics Show in Las Vegas.

On the other hand, the near-term market outlook for the consumer electronics stocks is very negative. The Dow Jones U.S. Consumer Electronics Index was the second-worst group last week, down 5% on fears of a consumer slowdown and investors rotating into other industries. While this appears to be an overreaction, it may not pay to jump in yet.

We strongly recommend that you listen in on the upcoming Best Buy conference call or other early retailer conference calls for traffic trends on the showroom floor and how these might impact year-end sales. If these are good, then it might make sense to add more Best Buy shares to your portfolio. If not, then consider selling or shorting positions in the other electronics retailers, especially the smaller-cap RadioShack.

Rudy Martin is the director of research for TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Martin cannot provide investment advice or recommendations, he appreciates your feedback;

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