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At a record high: Why are short sellers betting against the JB Hi-Fi share price?

The JB Hi-Fi Limited (ASX: JBH) share price hit a record high of $35.42 today and is now up around 46% over the past year on the back of a fiscal 2019 of strong revenue, profit and dividend growth.

Despite the strong performance on the back of a dominant competitive position and growing online sales the stock has been one of the most heavily shorted from within the S&P/ ASX 200 (ASX: XJO) over the past few years.

According to ASIC it had 12.5% of its outstanding scrip shorted as at October 2 2019 which is a significant amount for a business with a long-term track record of growth. 

The group paid dividends of $1.42 per share on trailing earnings of $2.174 over fiscal 2019 to mean shares change hands for 16.3x trailing earnings with a 4% trailing yield plus full franking credits.

JB Hi-Fi is not outrageously priced versus other growing businesses or successful retailers, so it seems short sellers are not betting against it primarily on valuation grounds. 

It did have debt of $439.1 million as at June 30 2019, but this is offset by cash on hand of $119 million to take net debt to $319.9 million on less than 1x EBITDA of $342.2 million.

It also managed to reduce net debt by $77.5 million over fiscal 2019 and its dividend payout ratio at around 65%  leaves plenty of cash leftover for reinvestment or to strengthen the balance sheet. 

It seems short sellers are most likely betting against it due to the belief that discount online only retailers like Amazon will take market share and force JB Hi Fi’s margins lower in a double whammy type knockout effect.

For now though that hasn’t materialised as Amazon Australia’s arrival has proven an over-hyped damp squib in terms of taking market share from Australia’s most successful retailers.

It’s also true that with stalling house prices, weak wages growth and rising unemployment that retail conditions in Australia are reasonably tough.

However, you can go back over any 20-year period in the history of retail and you’ll always find conditions being described as “tough” or “challenging” for various reasons. Retail is a tough, competitive business, with tight margins and working capital cycles. This means few retailers perform well as investments, but those that do can deliver strong returns. 

Others to consider in my opinion include Accent Group Ltd (ASX: AX1), Premier Investments Limited (ASX: PMV) and Breville Group Ltd (ASX: BRG)

While there are a bunch of others on the local market I would not touch with a barge pole. 

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Motley Fool contributor Tom Richardson owns shares of Accent Group.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia has recommended Accent Group. 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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