Best Buy (BBY: NYSE) is the king of electronics, effectively crushing every other electronics retailer that dares stand in its way.

This $23 billion retailing giant has decimated the likes of Circuit City Stores Inc. (CC: NYSE), a stock that analysts scream for people to sell about once a week now. Best Buy has eaten into Circuit City’s margins, causing the flailing chain to cut prices. Investors have noticed the downfall and have taken action: Shares of Circuit City are down almost 50% since October.

Earlier this month, Circuit City shares dropped to a 52-week low of $16.52 after the company announced it would post a first-quarter loss mainly due to lagging big-screen TV sales. Circuit City also withdrew its earnings outlook for the first half of the fiscal year, despite major efforts to cut costs and get back on track.

Circuit City’s outlook may be bleak. However, there’s one troubled specialty electronics retailer that makes Circuit City’s problems seem minimal. This company has watched its share price tumble from $7.50 a year ago to only 45 cents:

This company barely has the working capital to continue its operations, plans to close 49 stores and cut its workforce by 20%. It’s financial situation is so grim that it may have to file for Chapter 11 bankruptcy protection if it isn’t able to raise enough money to keep its head above water.

The company is high-end electronics retailer Tweeter Home Entertainment Group Inc. (TWTR: NASDAQ). And despite this company’s many problems, it could find its own market niche that the bigger retailers won’t be able to touch.

Tweeter operates 153 electronics stores in 22 states. Its mission is to provide high-end audio and home theater packages to selective electronics shoppers. As we have detailed, this model is getting whipped by the big players like Best Buy and Wal-Mart, both of which can offer better prices on similar items.

But this might not be lights out for Tweeter just yet. The company is closing about a third of its stores. And if it manages to stave off bankruptcy, we believe it has a shot to rebound because of two key factors.

You see, Tweeter can offer something that Best-Buy and Wal-Mart cannot: expert service. The kid in the blue shirt at Best Buy can only tell you so much about which receiver would work best with your dream home theater setup. Tweeter, on the other hand, can offer expert help in a smaller, more comfortable environment. Their sales staff undergoes 80 hours of initial training before hitting the floor — and that’s just for trainees. These are people who will be able to answer your complicated questions…

The second reason you may see a “Tweeter resurgence” is the questionable health of the retail sector right now. Wal-Mart is already suffering from lower retail numbers, and Best Buy might not be far behind. A blow to consumer confidence could hurt the big-boxes across the board if America decides to suddenly decrease spending (think higher gas prices).

A store like Tweeter, on the other hand, could be spared the brunt of this retail slowdown. Since Tweeter caters to wealthier shoppers, who generally are less effected by economic slowdowns, sales could still materialize.

Best,
Gunner
May 15, 2007

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they're discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite.

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