The stock market, as legendary investors from John M. Keynes to Warren Buffett have said, is a popularity contest in the short term that then turns into an intellectual contest in the long term. This is one credo retail investors must always keep in mind when navigating the often confusing price action of the market, such as today’s environment surrounding the technology sector and artificial intelligence.
This hype and excitement around a concentrated corner of the market have left behind other stocks that would otherwise warrant the attention of investors looking to find bargains with significant upside. There is no need to worry, though, as the market will always adjust back to fundamental realities and bring these bargains up to par.
That is why looking into the retail sector might benefit some investors, specifically shares of Best Buy (NYSE:BBY). Investors will soon find out why this stock has not only one of the best risk-to-reward ratios in the space but also an added benefit for those looking to generate additional income and liquidity while they wait for a bull run.
The Best Buy Discount: Unmissable Opportunity
Now that the stock trades at a low of 79% of its 52-week high, compared to the rest of the sector, Best Buy has become a great buy for those looking into the best risk-to-reward setups in the market. Some would argue that Best Buy doesn’t have the reach that Amazon.com (NASDAQ:AMZN) has or the diversification that Walmart (NYSE:WMT) offers.
However, Best Buy offers the unique opportunity to test out items before buying them and readily available staff to educate customers on how to make the best choice for their intended purposes. On the other hand, Amazon has now said goodbye to this try-before-you-buy model, leaving many buyers with a new sense of anxiety.
This small shift in the fundamental story might completely change Best Buy's financial picture, a theme already seen in the recent retail sales data report. Within this release, investors can see that the electronic and appliance store space (where Best Buy lives) showcases a 5.8% growth rate over the past 12 months.
Building on this momentum, coming from both the fundamental and financial end of the spectrum, investors can make sense of the recent opinions of Wall Street analysts. As of November 2024, those at UBS Group decided to not only reiterate their Buy rating on Best Buy stock but also placed a price target of up to $115 a share.
To prove this view right, the stock would have to rally by as much as 40.4% from its current low level. More than this, investors can check the signs coming out of the bearish side of the trade, such as the 6.5% decline in the company’s short interest, a clear indication of bearish capitulation in the face of this new development.
Replacing some of these sellers covering their positions were buyers from Geode Capital Management, an institutional buyer who boosted its holdings in Best Buy stock by 2.5% as of November 2024, bringing its net position to a high of $499.9 million today, or 2.3% ownership in the company.
A Dividend Bargain to Mix
On top of the improving underlying fundamentals and attraction for institutional capital, the perk of picking this stock near its lows is that the dividend payouts offered to investors would imply a higher yield today. This payout, which stands at $3.76 a share, would translate into a 4.6% annualized yield to beat inflation in the economy.
Another gauge that investors can consider today in building their bullish thesis for Best Buy stock is the way the broader market perceives the company today. Investors can find another optimistic point of view through valuation metrics comparisons, such as the price-to-earnings (P/E) ratio.
Best Buy stock trades at a P/E of 14x today, significantly above the electronic stores industry’s average valuation of 4.7x. Some would call this expensive and dismiss the potential deal. In contrast, others will understand that the market is always prepared to pay a premium valuation for stocks it believes will outperform in the coming months.
Many bears have argued that Best Buy's business model will become obsolete in the future. However, the value proposition already discussed seems to affect the company’s financials as well, as seen in the 19.6% return on invested capital (ROIC) rate over the past 12 months.