When a trade turns sour, smart investors stand by their convictions and use any share price weakness to build a bigger position. And that’s just what George Soros is doing with his investment in electronics retailer Best Buy (NYSE: BBY). Shares touched a new intra-day low on Monday, but Soros is holding firm. According to TickerSpy.com, he owns more than three million shares, and his last move was as a buyer of another 299,000 shares.

Soros isn’t looking like much of a market timer these days, as shares of Best Buy have fallen by nearly -25% during the past three months. But the legendary fund manager is focused on an important basic fact. This retailer isn’t hurting from increased competition (and indeed now has far less competition with the demise of Circuit City). Instead, demand for consumer electronics has hit a flat spot thanks to a weak economy and a lack of compelling new consumer electronics to buy. That flat spot should come to an end in a few quarters, and Soros will likely end up with a nice payoff for his patience.

Altering sales mix
Management has spoken during the past few quarters of the need to slightly alter the sales mix to keep sales and profits growing. For example, Best Buy is subtly de-emphasizing sales of CDs and DVDs and expanding its focus on more seamlessly connected electronic devices. The retailer is bracing for a fresh technology product cycle that makes it even easier for consumers to enjoy all of their music, movies, web-surfing, etc., on one platform. We’re now starting to see DVD players with Wi-Fi capabilities and web browsers. In coming months, an increasing number of Internet-connected TVs will hit the shelves.

By the end of the year, a new generation of stereos that also act as Internet/media hubs will also reach stores. That’s not all. As Verizon (NYSE: VZ) Wireless and AT&T (NYSE: T) Wireless roll out high-speed 4G phone services later this year, Best Buy should see a nice upgrade cycle in the area of smartphones. The company’s Best Buy Mobile division is the fastest-growing segment in the whole company. And Microsoft’s (Nasdaq: MSFT) Kinect full-body motion kit for the Xbox gaming platform, which will be released in October or November, is expected to be a hot item for the holidays.

To prepare for that onslaught of new products and the shift in sales mix that it should bring, management boosted spending last quarter to re-position floor space, open in-store kiosks that help consumers with any connectivity issues between their various devices, gear up marketing campaigns and adjust inventory. That led to an unusual — but temporary — spike in overhead expenses, yet management has repeatedly insisted that those costs should come down as the year progresses.

At the low end of the trading range
Best Buy has seen its shares move in and out of favor many times before. A look back at the trading and valuation ranges since 1999 is instructive. When demand has been robust, investors have often rewarded the stock with a P/E ratio north of 20. And in slumping times, the P/E ratio has fallen down to 11 on a pair of occasions. Now they trade for less than 10 times fiscal (February) 2011 profits.

Part of the reason for the share price weakness is that Best Buy badly lagged profit forecasts when it reported fiscal first quarter results in mid-June. Yet throughout the company’s conference call, management repeatedly insisted that full-year results would still meet forecasts. They expect profits to rise +8% to +10% this year, which if achieved, would be quite respectable in light of the weak economy and the dearth of hot new electronic products.

Action to Take –> Best Buy has moved out of favor a number of times before as investors fret about a lack of exciting new consumer electronics. Yet even at the bleakest of times, shares traded down to 11 times projected profits, as noted earlier. Simply rebounding back to that target P/E ratio would push shares up toward the $40 mark, some +20% ahead of current levels. And when business turns up as consumers start to shop for the holidays, that multiple should expand a few points, pushing shares back toward the $50 mark. That’s a solid +50% gain from current levels. This stock is truly washed out, and further downside appears limited while clear upside remains.

Looking further out, UBS sees a combination of slowly rising sales and net income, coupled with a steadily falling share count thanks to stock buybacks, pushing earnings per share (EPS) to $4.40 in fiscal 2012 (which is well above the consensus) and around $5 in fiscal 2013. They think shares will move back into the $50s once that long-term earnings strength comes back into focus. George Soros likely holds a similar view. Otherwise, he wouldn’t be doubling down as the shares weaken.