Friday, February 13, 2015

When's The Best Time To Get Back To Out Of Favor Stocks

Facebook Facebook, Sears, Best Buy Best Buy, and J. C. Penney are in different kinds of business. But they have something in common: Their stocks were out of favor at some point in the last two years.

The problem? They all had a broken business model. Facebook failed to monetize effectively its huge membership. Sears tried to become a real estate trust rather than a retailer, Best Buy became a showroom for Amazon.com Amazon.com. And J.C. Penney tried to be more like Apple Apple than Macy's.

In the last six months, Facebook and BestBuy's stocks have rebounded nicely, while Sears and J. C.Penney are still struggling. What has made the difference is this: Facebook and Best Buy have managed to fix their business model and regain momentum, while J.C. Penney and Sears are still working on it.

Here is how it happened.

Facebook

After being out of favor with Wall Street for more than a year, Facebook 's (FB) stock recently rebounded nicely. The catalyst? Strong Q2 results that beat analyst estimates by a wide margin (on the top line). Most notably, Facebook saw a big jump in mobile users and ads, areas where the company has been weak in the past.

Facebook successfully addressed two issues every web-based company faces. The first issue is size — that is membership and traffic. With hundreds of millions of members around the globe, Facebook is unquestionably the largest social site, providing the company both economies of scale (the benefits associated with a larger organization) and economies of networking (the benefits associated with a larger and larger number of people using a certain product or service).

The second issue is monetization of membership and traffic. With revenues exceeding $1.81 billion for last quarter, Facebook demonstrated that it could be a highly profitable company.

Best Buy

Once upon a time—before Amazon.com expand into the consumer electronics market—Best Buy was getting bigger and better, capitalizing on benefits associated with the opening of bigger stores in prime locations. Its revenues, profits and stock soared, catching the attention of business strategists and stock analysts.

After Amazon.com threw its hat in the ring, however, the game changed. Best Buy continued to get bigger, but not better. Its assets—location and scale—turned to liabilities.

In what has come to be known as "show-rooming," customers did their window-shopping at Best Buy, but did their actual shopping at Amazon.com — which offered better prices than Best Buy.

Best Buy's revenues, profits, and stock headed south. Business strategists and stock analysts were concerned about the future of the company.

In recent months, Best Buy seems to be getting its business model right, as reflected in its recent earnings reports. The company is capitalizing again on the benefits of scale and location, in two ways.

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