Best Buy Is in the Bargain Bin -- but It Won't Stay There Much Longer

NEW YORK (TheStreet) -- Even as the broader market trades at near all-time highs, bargain hunters don't need to look too far to find cheap stocks. Although the retail sector has been punished recently -- in part due to April's retail data, which indicated that consumers didn't spend much of their so-called "gas tax credit" -- Best Buy  (BBY) now looks like a solid contrarian play.   

The business conditions for the Richfield, Minnesota-based electronics retailer are not as bad as its stock price indicate. It seems the market has quickly forgotten that Best Buy's fourth-quarter earnings results demonstrated that some of its struggles are now in the past. So for investors looking to outsmart the market, here's your chance. 

Best Buy, trading at just nine times earnings and down roughly 9% year-to-date, has become a great buying opportunity ahead of the company's first-quarter fiscal 2016 earnings results due out Thursday before the opening bell. The shares appear unwanted and unloved

With BBY trading at a P/E that is 12 points lower than the S&P 500's average of 21), it is -- to borrow a phrase from Carl Icahn -- a "no-brainer". Consider this: If Best Buy were valued on par with the rest of the market, the stock would trade today at around $55, not $35. (That's based on its year-ago earnings of $2.60 per share, and multiplying by a P/E of 21.) 

Or, if Best Buy was valued on par with the narrower SPDR S&P Retail ETF (XRT), which focuses only on that sector and has an average P/E of 20, the stock would trade around $52 per share, or 48% higher.  

If you're looking for the reasons Best Buy is being discounted, one is surely that revenue growth has been hard to come by. For the quarter that ended in April, sales are projected to be down more than 6% to $8.48 billion. Plus, for the full year, projected revenue of $39.72 billion would be a 1.5% decline from last year's revenue of $40.34 billion. And it certainly hasn't helped that its projected full-year earnings per share of $2.46 would be a more than 5% drop. 

But here's the thing: The consensus projections for 2017 earnings are at $2.82 per share -- a 15% jump from 2016 estimates of $2.46. This means investors who buy Best Buy today can own a company that should soon be growing earnings at a 15% rate at the bargain-bin price of just nine times earnings.  

By next year, expect these shares will be more expensive to acquire, especially since the company's execution has already improved. In the most recent quarter, not only did Best Buy beat Wall Street earnings estimates by 13 cents per share, that the company hiked its quarterly dividend by 21% to 23 cents per share, which indicates management has become more confident about the company's financial position.

Add in Best Buy's announced $1 billion share buyback program, which it expects to complete by of 2018, and the stock will have plenty of support in the next three years, drastically improving its risk vs. reward profile. All told, Best Buy is now a great buy for investors looking for solid bounce-back play in retail.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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