Schafer: Analyst thought for himself, and he was right

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: November 20, 2013 - 5:45 AM

The Wall Street crowd isn’t known for independent and gutsy thinking, making the analyst David Strasser’s stubborn and lonely refusal last year to drop his buy rating on Best Buy look even better than the stock’s 227 percent gain so far this year.

For at least five months last year, according to Thomson Reuters, Strasser was the only analyst rating Best Buy stock a “buy” out of the more than 20 who provided an investment rating.

Strasser, a senior analyst for the investment firm Janney Montgomery Scott, could have joined all of his competitors on the sideline with neutral ratings in the spring and summer of 2012, and later come back to a buy rating in time to get his clients in for most of the big move up .

Instead, Strasser got to be very right but got there the hard way. He rode his highest investment rating from February 2010 all the way down through the stomach-churning results Best Buy disclosed after last year’s third quarter. That was exactly a year ago, and by then it was becoming popular for investors and analysts to question how much longer the company would still be around.

That wasn’t necessarily a crazy idea, either. Best Buy had announced in October 2012, with about a week and a half to go in its third quarter, that the business results were going to be worse than expected, and that earnings per share were going to be “significantly below” those of the year-earlier quarter.

One of Strasser’s competitors later called that “one of the most obvious statements we’ve ever seen coming out of a corporate press release.”

But the reality the company announced on Nov. 20 turned out to be even worse. Sales were down more, and profitability had all but evaporated. Even worse was that the company’s expectation of cash flow had come down a lot. Now the word “viability” started showing up in research updates.

“Eroding business model unlikely to rebound,” wrote the analyst Michael Pachter of Wedbush Securities after the quarter was announced, advising holders to dump their stock.

Strasser mostly shrugged off the bad news, writing “Tough Q3, but not much new.”

His big insight last fall, in retrospect, is so obvious that it’s remarkable that only he was willing to stick his neck out to share it. Best Buy, he had decided, wasn’t going out of business.

Strasser certainly recognized Best Buy’s challenges. His case was that sales weakness was related in part to product cycles in key categories such as televisions, and that other problems were, if not exactly easy to fix, at least fixable.

He said he also grasped right away that CEO Hubert Joly had been underestimated by investors, that he wasn’t just a local hotel guy who happened to be available to Best Buy when the CEO job opened up last year.

“People said I was just wrong,” Strasser said, of the fall of 2012. “It was just not up for discussion. But I felt I had a more analytical view than ‘It’s going out of business.’ ”

Strasser said that when he was on trips to meet with professional investors, anytime he wanted to make sure he could catch his plane, all he had to do was simply say “Best Buy” out loud. That ended any meeting.

An analyst who is spectacularly wrong doesn’t only get pounded by portfolio managers, either. There is typically an even grumpier group just down the hall from his office: the institutional salespeople.

Andrew Maddaloni, Janney’s director of equity research, is relatively new to the job, but as a former portfolio manager he first knew Strasser through the lens of a client. Taking the heat, from both inside and outside the firm, he said, is why even veteran analysts “take the path of least resistance” by dropping to a neutral investment rating.

“The institutional sales force was living that slow death with him,” Maddaloni said. “So they come out of their morning meeting and call their accounts and say, ‘Strasser just reiterated his buy on Best Buy,’ and the guy says, ‘That’s what he said 10 points ago. Or 20 points ago.’ ”

Strasser said he noticed the conversation beginning to change when the company reported flat comparable-store sales for its nine-week holiday selling season last year. His competitors started jumping off the fence, and there was one new strong buy rating in each of January, February and March.

At last count, of the two dozen analysts with an investment rating on Best Buy’s shares, 15 had a buy or strong buy rating.

As the stock climbed this year, Strasser said, he heard from plenty of formerly skeptical clients, with some referring to Best Buy as his “career call.” He volunteers that it’s more fun to be right but that he has been on the wrong side of plenty of recommendations, and will be again.

Tuesday’s quarterly announcement of slightly weaker than expected comparable-store sales took a little air out of Best Buy’s stock, as it closed back under $40 per share, perhaps serving as a reminder that Best Buy’s business remains a challenging one.

As for Strasser’s third-quarter take, maybe it’s enough just to note this headline from his update: “Chillax — BBY Is Gonna Be Just Fine.”

If Best Buy is, in fact, just fine, then there will need to be other analysts on the medal stand with Strasser. The first to join him with a buy appears to have been Anthony Chukumba of BB&T Capital Markets, at the end of January with the stock at $15.78 per share.

“Everyone currently hates Best Buy — which is a good thing,” Chukumba wrote, making the classic smart contrarian call for buying a stock.

Of course, it was not quite true that everyone hated Best Buy. Just nearly everyone.

 

lee.schafer@startribune.com • 612-673-4302

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