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Is FY19 the year of downgrades for JB Hi-Fi Limited (ASX:JBH)?

The share price of JB Hi-Fi Limited (ASX: JBH) is surging higher today as investors had a second look at its results.

The stock surged 4.1% to $24.33 in after lunch trade to become the second-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index. This is in contrast to yesterday’s retreat even after management posted a slightly better than expected result.

Its lacklustre performance surprised some experts given how much bad news had been factored into its share price and the fact that it’s the most shorted stock on the market.

Perhaps today’s rally is due to a short-squeeze as short-sellers have decided to lock in some profits after the stock’s 12% drop since the last reporting season. Short-selling is when a trader borrows stock to sell on-market in the hope of buying it back later at a lower price.

When a number of these short-sellers buy back a stock at the same time to close their bearish position, it creates a short-squeeze that can send a stock jumping sharply higher.

What I think is also interesting is that brokers haven’t changed their opinion of the stock in light of the latest results. I would have thought some would have upgraded the stock given that the wheels haven’t fallen off even with the arrival of Amazon.com and the falling housing market.

If anything, brokers who have been bearish on the stock are doubling down. For instance, Credit Suisse is predicting that FY19 will be a year of consensus downgrades for the retailer.

JB Hi-Fi may have done well to hold the fort in FY18 but the challenging operating environment isn’t improving this financial year and may actually get worse.

The merging of The Good Guys following the acquisition of the business is also no panacea, according to Credit Suisse.

“Our instinct is that the uniqueness of TGG is lost, performance inevitably gets compared with JB Hi-Fi (conversations turn to how to replicate JBH in TGG) and at some point the reason for a standalone brand gets lost,” said the broker, who has an “underperform” recommendation on the stock with a price target of $22.07 a share.

“TGG’s promotional strategies have already shown a noticeable shift towards ‘JBH’ and there has been a far greater emphasis on consumer electronics within TGG.”

But some might argue that the stock is getting too cheap to ignore. Morgan Stanley points out that the stock is only trading on a price-earnings multiple of circa 11 times and the low valuation doesn’t reflect management’s strong track record of share market gains.

I agree that JB Hi-Fi is very well run and is cheap. The only issue is that I am not sure what the catalyst will be to sustain an upswing in its share price.

It is only going to get increasingly challenging for traditional retailers to compete against online-only operators in the consumer electronics segment.

This isn’t a problem that’s unique to JB Hi-Fi. Its peer Harvey Norman Holdings Limited (ASX: HVN) is pretty much in the same boat.

If I were to look for exposure to the retail sector, I would target businesses that are better able to compete against Amazon, such as those with strong brands like Premier Investments Limited (ASX: PMV).

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. 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 Scott Phillips.

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