Why I shorted Best Buy «

    Why I shorted Best Buy

    Shares of Best Buy /quotes/zigman/219712/delayed/quotes/nls/bby BBY -0.23% — which had soared more than 300% from a low in 2012 to a high during pre-Black Friday excitement in mid-November — are collapsing Thursday morning after the company reported weaker-than-expected sales figures, with holiday revenue of $11.5 billion vs. the $11.8 billion expected on a -0.8% drop in same-store sales over the last year. Management noted that market share expanded at the expense of margins as they stick to an online price-matching offer to thwart what was an existential threat from Amazon /quotes/zigman/63011/delayed/quotes/nls/amzn AMZN -0.03% and other low-cost online purveyors of TVs and electronics.

    Enlarge Image Noting weakness in retail stocks all month, I recommended clients short BBY back on Dec. 30 and added it to my Edge Letter Sample Portfolio . As a result, the short position is up nearly 33% for us. Here’s my justification for the move.

    For one, I believe household spending is more constrained than the bulls would like to believe. We’ve seen a drop in the savings rate to 4.2% — down from the 7%+ seen in 2008 and 2009 — as consumers pinched by stagnant wages have been forced to desperate measures to maintain spending. Consumer credit is also up, mainly for autos.

    As a result, growth in real personal-consumption expenditures is growing at a rate that’s at or below levels associated with each and every recession since the mid-1950s. So yeah, the consumer isn’t healthy.

    Enlarge Image And that’s because real disposable personal income is growing at just a 0.6% year-over-year rate, down from 2.2% back in September and off of an average of 1.9% since the recession ended. Compare these numbers to the 6.5% growth posted in 1998 at the height of the dot-com boom.

    Fundamentally, Best Buy’s strategy of matching Amazon’s bid for revenue and market share over profits feels like survival instinct — not an exciting new opportunity.

    Part of the problem is that the product cycle in electronics isn’t favorable right now, with HDTVs saturated, 3-D TVs never catching on, 4K TVs still prohibitively expensive (and of arguable benefit given lack of content), new-game-console supply constrained and increasingly focused on digital-only games — witness the meltdown in Gamestop /quotes/zigman/389699/delayed/quotes/nls/gme GME -0.80% — and mobile devices just as available direct from manufacturers or wireless-service providers.

    Enlarge Image Moreover, retail stocks as a whole are now breaking down out of a multi-month consolidation pattern. Best Buy is among the weakest stocks in the bunch as it faces severe, fundamental headwinds.

    Another retailer I’m short of is Office Depot /quotes/zigman/236952/delayed/quotes/nls/odp ODP +3.35% , which, like Best Buy, is also struggling to justify its existence in an increasingly indifferent marketplace. Shares of ODP are threatening to fall through their 200-day moving average for the first time since late 2012