JB Hi-Fi Benefiting from Dick Smiths Demise

JB Hi-Fi [ASX:JBH] has had a great start to the New Year. Its shares have smoothly climbed 8.6% since Monday open. Performance, it seems, has carried over from JBH’s solid trading period through Christmas into the New Year. JBH continues to beat out the electronic competition. Its shares rose 9% from mid-December till the end of 2015. And shares may continue this trend until the end the first week of the New Year.

JB Hi-Fi Jan 2016

Source: Yahoo finance

JB Hi Fi surges ahead of the competition

The Dick Smith Holdings [ASX:DSH] debacle has been all over the news recently. Will they fail? Or will they manage to finance their way out of trouble?

Well if they do fail, it could be good news for JBH. I know it sounds brutal, but it’s true. Even Morgan Standley analysts agree, stating to investors, ‘the Dick Smith administration could be good news for bigger players like JB Hi-Fi’.

JBH has the largest market share in the electrical/electronic industry to date, 16.1%. Harvey Norman Holdings [ASX:HVN] closely follows with 15.9%. Yet it seems investors believe JBH will benefit far more from DSH’s downfall.

How can you tell? Just compare how both stocks have been performing over the past three days. JBH has climbed 8.6% whereas HVN is up only 0.95%. And why shouldn’t investors be eager to get their hands on JBH’s stock? In the past few days there has been nothing but talk of how JBH’s profits will soar as a result of Dick Smith failing.

Some believe that JBH’s earnings could be lifted by as much as $19 million for FY16. Analyst like Craig Woolford are already trying to predict the success of JBH, stating:

JB Hi-Fi could capture 50 per cent of sales lost through Dick Smith store closures, this would be $106 million or a 2.8 per cent boost to like for like sale growth.

How to perceive JB Hi-Fi’s share price jump

There are some analysts who believe JBH would be a good short term investment going into 2016. Yet it would be unwise to fall into a herd mentality. You shouldn’t jump into a stock because everyone said it can’t lose. That’s a sure fire way to lose money.

Just like with any stock, buying JBH shares still has risks involved. For example, JBH is one of the most shorted stocks on the ASX 200. Meaning professional investors believe JBH’s intrinsic value is much lower than its market value. Do you really want to be on the other end of hundreds, if not thousands of investors who are pushing JBH’s share price down?

Many prominent financial professionals are attributing JBH’s success to DSH’s destruction. But it’s better to think of JBH’s success as investors squaring away their positions.

JBH is one of the most shorted stocks on the ASX 200. So if investors want to secure profits and get out of their positions, they will need to buy JBH. The action of buying will remove short positions in the market and drive share prices up.

So proceed with caution. A health dose of scepticism can go a long way.

Härje Ronngard,

Junior Analyst, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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