5 Stocks That Benefit From Others' Losses

Circuit City’s demise seems to have enriched its rival’s stockholders. Since the electronics seller declared itself bankrupt in November, Best Buy (BBY) shares have gained 10% -- despite the broad market dropping 14%.

Investors are likely betting the shuttering of more than 500 Circuit City stores in the U.S. will increase Best Buy’s customer traffic, pricing power and bargaining ability with suppliers. Since November, three Wall Street analysts have changed their neutral opinions on the stock to buy recommendations. Another, Jason Blair with Stamford, Conn.-based Rochdale Research, has done the opposite, advising investors to sell. He calls the stock’s climb a “head fake” and Circuit City’s collapse “no panacea” for Best Buy, which still faces weak customer spending, thin margins and fierce competition from the likes of Wal-Mart (WMT) and Amazon (AMZN).

Therein lies the challenge for investors in judging the potential gains for the companies listed below. Each has sturdy finances and a top position in its industry and at least one big competitor in worrisome financial shape. But each also faces its own sales challenges, and the financial difficulty of a competitor doesn’t necessarily mean it will go out of business. After Circuit City declared bankruptcy but before it announced its liquidation in January, potential buyers considered shrinking the chain by half. Still, with 2009 already proving a boom year for bankruptcy lawyers, it’s worth considering which companies might see long-term benefits from their industries’ near-term difficulties.

Long before Americans soured on shopping they had grown less interested in buying books. A 2007 report by the National Endowment for the Arts titled “To Read Or Not To Read” (which I only skimmed) found that consumer book sales peaked in 2000 and that over 20 years ended 2005, household spending on books dropped 14%, adjusted for inflation. Barnes & Noble’s (BKS) sales are expected to fall 3% this fiscal year, which runs through Feb. 2, 2010, and high fixed costs are seen magnifying that decline into a 23% drop in earnings per share. But the chain at least is profitable and minimally indebted. Rival Borders Group (BGP), which owns its namesake chain and mall bookseller Waldenbooks, owes a massive amount for its size, is producing double-digit sales declines and hasn’t turned a profit since 2006. Barnes & Noble seems modestly priced; the whole business goes for $930 million, while its yearly sales top $5 billion. Shares yield 5.8%, and management announced a dividend payment Wednesday.

Plenty of clothing sellers look likely to fail this year, but with fashion too fickle to forecast, it’s difficult to say which of the well-capitalized ones, like Chico’s FAS (CHS) and Gap (GPS), will catch customers’ attention when spending picks up again. Two other retailers warrant mention, though. On Friday I noted that Tiffany’s (TIF) looks cheap using the math of takeover specialists. The jewelry store business is highly fragmented and under serious stress. Mall jeweler Zale (ZLC) carries debt equal to almost 10 times its stock market value. Tiffany carries modest debt, is still solidly profitable, and has a relatively small base of stores to support (and some day, room for expansion). So does online merchant Blue Nile, but it goes for 27 times this year’s earnings forecast, versus 10 times earnings for Tiffany.

Office Max (OMX) on Wednesday reported a fourth-quarter sales decline of 14% and a loss of $5.21 a share -- about a dollar more than its current stock price -- on asset write-downs. The company doesn’t seem in immediate risk of running out of funds, with more than $500 million of credit available on a $700 million facility. But long-term debt is well more than the company’s stock market value. So is the amount by which its pension account is underfunded. And operating margin is already half that of the industry’s strongest chain, Staples (SPLS). It’s increasing sales, if not profits, and unlike Office Max has stuck by its dividend. Current yield: 2.1%.