I have mentioned it before, I generally don’t like to trade against large market short positions in stocks that are in strong downtrends. More often than not, the big hedge funds know something the rest of the market does not and invariably they win. Big time. Large short positions in recent years over the mining services companies, Myer, Slater & Gordon, Dick Smith and so on have all netted large profits.
However, the combination of a share price on the verge of fresh record highs and a large short position is a recipe for a short squeeze. JB Hi-Fi (JBH) has these very ingredients and with a move to record highs, every short seller will be losing money, underwater and under pressure to cover.
JB Hi-Fi has been a short sellers favourite as many US hedge funds have viewed the stock in similar fashion to Best Buy in the US which as an electronics retailer has experienced difficulty maintaining margins and profitability in the past decade. However, as JBH management in several presentations over the years have pointed out, they are unlike Best Buy and in fact any other retailer in Australia.
JBH do not lease large floor plans with amples of room between products and stands. They are tightly packed with very little spent on “beautifying” the store resulting in costs per square metre of floor space significantly below that of many of competitors (known as Cost of Doing Business). This translates to greater margins and better profitability.
Furthermore, the retail landscape in Australia has begun to shift in favour of JBH and Harvey Norman with the demise of Dick Smith. Those Dick Smith revenues are “up for grabs” and from the latest 3rd quarter sales numbers, +5.2%, it seems even the huge discounting by Dick Smith to remove all stock has had little impact. The decision to close (or sell) Master’s stores is also a win for JBH given that Masters do sell a large portion of white goods which will benefit the JBH HOME brand. Earnings should continue to grow as appliances are added to existing stores, new store rollouts and online sales steadily increase.
The JBH share price is teetering at record highs, making an attempt to breakout. The monthly chart below shows JBH retesting a series of highs that stretch back to the 2009 highs. As a result JBH has been consolidating for the past 7 years, providing a lengthy period of time for the underlying earnings to catch up to the share price and become attractive again. The last time JBH tried to break through to record highs in mid-2009 – above the 2007 high at $17 – the share price enjoyed a $7 run. A repeat of that move would see levels into the $30/31 zone reached.
Most encouragingly though is that the JBH share price for the past four months has managed to consolidate in a tighter $21/24 zone. This gives the impression the stock is coiled and building momentum as each pullback is met with increased buying interest. The Relative Strength Index is also on the verge of breaking its own long-term resistance which only adds to the significance of a break above $24.
As a result JBH is a an example of one of our bottom-up, stock specific trades that looks to buck the broader global bearish macro trend of lower equity prices. Above $24, the shorts will be getting squeezed.