Every dog has its day and the Harvey Norman Holdings Limited (ASX: HVN) share price is finding some love after Macquarie Group Ltd (ASX: MQG) upgraded the stock.
The Harvey Norman share price jumped 4% to $3.40 to become the forth best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index on Wednesday.
The furniture and electronics retailer had been on the top of the charts but it slipped at the close as it was unseated by the Saracen Mineral Holdings Limited (ASX: SAR) share price, Bapcor Ltd (ASX: BAP) share price and Costa Group Holdings Ltd (ASX: CGC) share price.
Harvey Norman in the "buy" zone?
Nonetheless, Harvey Norman shareholders should still be pleased to see the stock hit a three-month high after its big fall in 2018 due to growing online competition and a slump in the housing market that is dragging on consumer spending.
But everything has its price and the analysts at Macquarie thinks the stock has become too cheap to ignore even though the broker is expecting a challenging environment for consumer stocks in 2019 as it's forecasting a slowdown in consumption.
"Our review of household discretionary incomes remains cautious on the year ahead," warned Macquarie.
"The Macquarie Desk Strategy Economics team assumes strong population growth of 1.5% (world: +1.2%) and household consumption growth (real) of ~2.25% in 2019, down slightly from ~2.75%, to reflect greater weakness in spending related to lower housing turnover and adverse "wealth effects" from falling dwelling prices."
This is why investors will need to take a bottom-up approach in picking winners in the sector and Harvey Norman is one that Macquarie is tipping to do well as it upgraded its recommendation on the stock to "outperform" from "neutral".
"Whilst structural threats from online, cyclical housing slowdown as well as business specific factors on corporate governance etc. remain, with ~50% of EBITDA [earnings before interest, tax, depreciation and amortisation] in good shape (International & Property) likely shielding downside to group outcomes and trading on 10x P/E [price-earnings] with asset backing we are more positive," explained Macquarie.
Better options
However, Harvey Norman is not the broker's preferred pick in the sector. That crown goes to its rival JB Hi-Fi Limited (ASX: JBH) as it's also trading on a P/E of 10 times and Macquarie believes that the Christmas trading period went reasonably well for the group despite volatile consumer sentiment.
If I had to pick one, it would also be JB Hi-Fi as the electronics and whitegoods retailer has a better track record in delivering for shareholders.
I have corporate governance concerns regarding Harvey Norman and I don't invest in companies I don't trust no matter what the valuation tells me.
