Stock Investment Journal: JB Hi-Fi (JBH)JB Hi-Fi Limited (JBH) is a specialty discount retailer of...

Copyright © Colin Nicholson

Stock Investment Journal: JB Hi-Fi (JBH) Important

The stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

You need to assess the relevance of anything in this journal to your investment plan, seeking advice from a licensed adviser if you are not able to make such an assessment for yourself.

I am using stock investment journals of stocks I own (or consider owning, but decide against doing so) only as examples to teach the way I think about investing. In doing so, I am neither making nor implying any recommendation for anyone to invest in this or any other stock.

Open and use bookmarks in the PDF file to jump directly to sections in this journal:


How I found this stock JB Hi-Fi had been appearing on my scans for stocks making new 52-week highs and I had it on my watch list.

Company profile JB Hi-Fi Limited (JBH) is a specialty discount retailer of branded home entertainment products. The Group's products particularly focus on consumer electronics, electrical goods and software including music, games and movies. The company primarily operates from stand alone destination sites and shopping centre locations in Australia and New Zealand.

Consumer Electronics & Car Sound Systems JBH offers the leading brands of Hi-Fi, Speakers, Televisions, DVD's, VCR's, Cameras, Car Sound, Home Theatre, Computers and Portable Audio and continues to stock an exclusive range of specialist Hi-Fi products.

Music & DVDs JBH offers the largest range of video games, recorded music, DVD music and DVD movies with over 50,000 CDs and most major studio DVD releases, all at discount prices. Customers are able to buy online from the range of CDs, DVDs, and games.

Source: Stock Doctor

In December 2012 we commenced a trial of our “HOME” store concept with a total of 8 stores converted by the end of FY13. Sales results during the trial period were positive, with strong customer engagement with the new categories and no negative impact on existing JB Hi-Fi business. We are excited about the sales growth opportunity that the circa $4.6 billion home appliance market presents.

The trial “HOME” stores demonstrated how JB Hi-Fi can integrate the home appliance categories within its existing model while maintaining the unique JB Hi-Fi brand personality. We anticipate converting 10 additional existing stores in FY14 and see the potential for approximately 50 HOME stores over the next three years. The long term store number opportunity is still to be fully quantified, as this will be dependent on space available in existing stores and the suitability of new store locations.

Source: CEO address to AGM


Which model?

To be on the conservative side, I am classifying this as a value model chart.

However, it is also possible to see it as a growth model chart, if we see the 2007 through 2013 period as a large consolidation pattern. In saying this, the drop in 2007/08 does not bother me, but the drop from the 2009 peak is a real challenge. Hence, my caution in classification as a value model chart.

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30.00MOV AVS 12(0) mnth 16.505 M @ M 311003-291113 JBH - JB HI-FI LTD > -1.3% -0.28 to 22.02


Earnings and dividend quality

2012 saw a drop in earnings and dividend. 2013 has seen a partial recovery. The retail climate seems to have turned from comments by Gerry Harvey et al, but Wesfarmers and Woolworths are finding the going tough.

Store expansion can drive earnings and dividends even when retail sales are subdued.


Return on Equity

My cost of capital 12.5% My hurdle rate for ROE 15% This company’s latest ROE 47.8% Recent trend in ROE down

I am not worried about the trend here. This company is outstandingly profitable.


Pre-purchase checklist

This looks OK for a growth model stock, but is a bit on the expensive side for a value model stock.

However, with a long term growth trajectory in earnings and dividends, it may never be easy to buy such a good business cheaply.

Confession: I have taken far too long to act on this one (due to personal factors in my life).

DateStock

ASX CodeModelStage

Mkt Av AssessmentPlan Req V Plan

Price Earnings Ratio 18.82 16.92 High OK if seens a growth model

Dividend Yield 3.27% 4.09% Low OK if seen as growth modelFranking 100% Yes OK

Return on Equity 47.8% >15% OK

Debt/Equity Ratio 51.00% <60% OK Interest Cover 17.5 times

Mkt Capitalisation $2.2b >$100m OKLiquidity (22-day Av) $8-10m Enough OK

GuidanceSales increase of 6 to 8%

CommentsMargin of safety criteria Stock

6/11/2013JB Hi-Fi

JBHValue (May be Growth?)

Uptrend


Chart analysis

The price is trending upward strongly. It is approaching the range of the all-time high at the left of the chart, which may occasion some resistance.

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24.00W @ W 020109-081113 JBH - JB HI-FI LTD > -1.3% -0.28 to 22.02


Set stops

Low price used to base stops $18.22 Soft stop (one minimum bid lower) $18.21 Hard stop (2% below soft stop) $17.85

I have situated my stops under the low of the last correction that took the form of a sideways trading range, as is not unusual in strong trends. This was also a very significant support level from earlier price action.



J F M A M J J A S O N D2011



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Calculate position size

To invest 2% of capital, I am risking 0.37% of capital back to my hard stop.

Position size 1st trancheTotal Capital 2,218,047

Buy Price 22.000Hard Sell-Stop 17.850Risk 4.150

% Capital to Invest 2Position it buys 2,016

Max % Capital to Risk 0.5Maximum Position 2,672

Position allowed 2,000

% capital at risk 0.37

% capital invested 2.0


Managing the investment On 6 November 2013, I bought 2,000 shares at $22.03.

Updated to 20 December 2013 After I bought JB Hi-Fi it went into a moderate correction which found a bottom on 13 December 2013 in a weak market. The chart looked like this:

Then it began to rally and looked like this at the close on 18 December 2013 in a market that seemed to have exhausted its correction:

I decided to invest a further 25 of capital and placed my order in the market before the market opened and was out for the whole day. I did not get a fill.

At the close of 19 December 2013 the chart looked like this:

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24.00W @ D 130209-131213 JBH - JB HI-FI LTD > +3.5% +0.69 to 20.67

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The market had risen over 100 points that day and JB Hi-Fi had been carried with it.

I then re-calculated my positions size. The calculation looked like this:

To invest a further 2% of capital, I would be risking a further 0.27% of capital back to my hard stop.

On 20 December2013, I was able to buy 2,100 shares at $20.70.

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Position size 1st tranche 2nd trancheTotal Capital 2,218,047 2,217,750

Buy Price 22.000 20.700Hard Sell-Stop 17.850 17.850Risk 4.150 2.850

% Capital to Invest 2 2Position it buys 2,016 2,143

Max % Capital to Risk 0.5 0.5Maximum Position 2,672 3,891

Position allowed 2,000 2,100

% capital at risk 0.37 0.27

% capital invested 1.98 1.96


Update to 30 January 2014 After I bought the second tranche of JB Hi-Fi, the price continued to rally, but failed to make a new high and started to come off the lower peak strongly. This is how the chart looked on 17 January 2014:

I was not unduly concerned, because this was in the vicinity of the 2009 and 2010 highs, where resistance is to be expected. Nevertheless, by Friday 24 January 2014, the price fell below the previous trough and one of my alternative sell signals was in place: a lower peak followed by a fall below the last trough (definition of a downtrend):

I resolved to see when the market reopened on Tuesday 28 January 2014. However, before the market opened on that day, JB Hi-Fi made an announcement that profit for the half year to December 2013 would be up 10% and the market opened significantly higher. So, although I had a

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24.00W @ D 060209-170114 JBH - JB HI-FI LTD > -2.8% -0.52 to 17.73

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sell signal, I was in no hurry to sell if the price were now well above my stop and sell signal point. This is how the market closed 28 January 2014:

I checked the market early on 29 January 2014 and it had opened only slightly lower. I did not have an opportunity to check it again until that evening, when I found that the price had fallen significantly on the day, making a new low:

I sold my holding on 30 January 2014 at $17.78. This is how the chart looked at the end of that day:

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It had also fallen through my stop as shown on the chart.

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Outcome of the investment

The risk on the first trance had been 0.37% of capital and on the second trance 0.27% of capital, a total of 0.64% of capital, so the end result at 0.67% was very close to the risk management part of my investment plan.

Evaluation against investment plan

Model identification Correctly identified as value model Capital invested 4% of capital in two tranches Diversification I had holdings in three other retailers – all different types – but my overall

exposure was well within my investment plan Max % capital risked 0.64% in total in two tranches Liquidity JB Hi-Fi is very liquid Buy Signal Uptrend Margin of safety PE ratio and dividend yield were out of line with my value criteria. I was

seeing JB Hi-Fi as a growth business even though it had a value model chart. Maybe I should have been more cautious. I was cognisant that low interest rates were driving PE ratios higher and that I was less exposed to the market than I wanted, so was anxious to find stocks to buy.

Position building Second tranche of 2% of capital Profit-taking NA Sell-stop Acted on alternative sell signal, though stop was violated that day also Re-entry I will await a new set-up

Result of investmentTotal sale proceeds 72,825.10less Total purchase cost 87,617.53plus Dividends 0.00plus Imputed credits 0.00Net total return -14,792.43% of capital -0.67

Stock Investment Journal: JB Hi-Fi (JBH)JB Hi-Fi Limited (JBH) is a specialty discount retailer of...

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