Confident consumers will lead the markets
The latest numbers show that Americans are in a buying mood. One possible beneficiary: Best Buy, because HDTV will be on a lot of shopping lists.
By James B. Stewart
moneycentral.msn.com
I'm not surprised by the market's recent strength. Have you noticed the first-quarter earnings reports that have been rolling in? They were supposed to be dismal, depressed by war fears, rising unemployment and the general malaise that was so pervasive after the first of the year. Lo and behold, it's been one positive surprise after another. According to Thomson First Call, earnings reported so far by companies in the Standard & Poor's 500 ($INX) are up 11.7% for the first quarter, much better than the 8.5% predicted by analysts as recently as April 1.
Bear in mind that these are backward-looking numbers. They don't reflect the recent military victory in Iraq or the drop in oil prices. Add to that a boost in consumer morale as well as business confidence, and you have a recipe for a strong recovery.
The Conference Board reported on Tuesday that its index of consumer confidence rose sharply in April, far more than economists were predicting. On a recent trip to the Midwest, I found people in a much more buoyant mood than my colleagues in the media here in New York. And having spoken to a number of people on corporate boards recently, I can report that they're gearing up to spend money. The reason is simple: The war clouds are gone, none of the dire warnings proved true and the future looks more promising than it has at any time since Sept. 11. Naturally, people feel better.
This bodes well for the consumer-spending sector, which has been depressed for nearly a year on expectations that low consumer confidence, rising unemployment and consumer debt will finally lead to a sharp decline. But those are backward-looking numbers, too. Consumers have proved surprisingly resilient even in the face of bad news, and I expect that to continue, especially after the recent positive news.
Best Buy isn’t a bad buy
This has implications for a broad array of companies, but one that interests me is Best Buy (BBY, news, msgs), the electronics retailer. Numerous research reports cross my desk every day, and after this week's settlement over Wall Street conflicts of interest, you'll understand why most of them go straight into my wastebasket. But a recent report on Best Buy from Merrill Lynch analyst Douglas Neviera caught my eye. You may recall that Best Buy was one of the best performers of 2001, soaring from just over $14 in late 2000 to a peak of nearly $54 in March of last year. Then it fell off a cliff, dropping all the way to $17 last fall. It has since rallied to about $33.
While the electronics marketplace is crowded, Neviera mentions that Best Buy is gaining market share, especially against troubled rival Circuit City (CC, news, msgs). It's also expanding with smaller-format stores and enhancing its Web site (you can check it out yourself in the link at left) But what I found most compelling was his argument that declining prices will bring high-definition television into the mainstream.
Perhaps this resonated with me because I'm thinking of buying one myself. I don't watch all that much TV, but when I do, I want to enjoy the experience. A recent Masterpiece Theater broadcast in HDTV had wavy lines that nearly made me seasick. Ditto the recent Master's tournament -- I could never see the golf ball. And what's the point of DVD without a decent TV? I don't need a two- or three-inch deep screen I can hang on the wall, and certainly not at $10,000 and up. But many of the HDTV sets are thin, at least compared with the model I now own, which is almost as deep as it is wide, and takes up inordinate space. These sets, I learn from the Best Buy Web site, can now be had for less than $1,000.
Extrapolating from my experience, I sense that demand for new TVs could be huge, and Best Buy should benefit.
But buy now?
Best Buy has already doubled off its low, and in any event, we're not at a buying point in my approach to investing (on the contrary, at this rate we'll soon be at a selling juncture). But I mentioned last week that I might plow my Cablevision (CVC, news, msgs) proceeds into another stock on any market weakness, and Best Buy will be a candidate.
Out of curiosity, I glanced at the options pricing on the stock. I'm not sure you can trust the price quotes in some of these thinly traded contracts, but the January 2004 $20 calls were selling for a little over $10. With the stock at about $34, that seems a no-brainer (if such a price really exists). The $35 January calls were fetching $5, which seems more reasonable, and therefore not nearly as attractive (the stock would have to gain $6, or almost 18%, by January before you'd start to show a gain.) Of course, I could simply buy the stock and plan to hold it for the two to three years that I expect this cycle to play out.
Overall, the market's recent run-up has made me cautious about buying stocks. Although there haven't been any huge, one-day rallies, the market hasn't been blind to the good news. And yet a surprising number of investors are only now asking me for stock tips -- people who, just a month ago, didn't want to talk about the market. I'm afraid it's too late, at least for the major gains. If you have modest expectations, I think there will still be some more gains before it's time to sell. My advice is to be patient: There are always good buying opportunities eventually.
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