Should you buy shares of JB Hi-Fi Limited and Nick Scali Limited?

Credit: Peter Heath

The housing boom has helped to propel shares of businesses such as Nick Scali Limited (ASX: NCK) and Harvey Norman Holdings Limited (ASX: HVN) higher, but investors need to be cautious.

Shares of Nick Scali, a furniture retailer, have soared more than 63% over the last 12 months. Harvey Norman shares have gained 27%, with Fantastic Holdings Limited (ASX: FAN) and JB Hi-Fi Limited (ASX: JBH) also up 24% and 59% during the same time.

By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up a mere 2.4%.

The strength of the housing market has been one of the primary factors behind this trend which has generated significant returns for investors. When people buy a new home, they’re often inclined to buy new furnishings as well. What’s more, rising house prices mean that consumers feel wealthier which can also boost their confidence to spend.

But what happens if house prices fall, or even if the growth in house prices simply slows down?

That’s what investors need to be mindful of before buying shares in the businesses mentioned above – particularly the likes of Nick Scali and Fantastic Holdings. Harvey Norman sells furniture but is also a retailer of electricals, while JB Hi-Fi is predominantly a specialty electrics retailer which has recently expanded into the white goods market.

A report in The Australian Financial Review yesterday highlighted how property buyers are growing wary of the ‘irrational’ market, whereby the values of homes in Sydney have become so unpredictable. BradfieldCleary co-director Georgia Cleary was quoted as saying:

One thing about the market is how unpredictable it is… I used to be able to walk in and tell what the value of a home is, but now it can be way under or over [when it goes to auction].”

To be clear, I am not necessarily predicting a drop in the housing market, nor am I suggesting there is a pending crash in the market. What I am suggesting, however, is that investors should consider the risks before investing too heavily in the businesses mentioned above based on the assumption they will continue to soar in price.

Indeed, I really like JB Hi-Fi as a business while Nick Scali has also suggested market conditions remain favourable for another cracking result this financial year. Both shares could well climb higher from their current levels.

But as Nick Scali’s management team so openly noted in their 2016 Annual Report: “The furniture market is closely tied to the housing market and consumer confidence.” Just be careful how much you’re willing to pay for the shares considering that risk.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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