One of the preliminary screeners I like to use when searching for stocks that are potential buys is the Price to Earnings (PEG) ratio. See this post for details on this ratio. The table below (from Aegis Equity Research) shows top Australian stocks by PEG ratio as of January 2008.
Two that I like are Babcock and Brown Wind partners (BBW) and JB Hi-Fi (JBH). I have written about BBW previously (see here) and still think it is a good buy despite recent market volatility. The shift towards Green Energy is a global trend that continues to gain momentum, making companies that provide these types of energy, a good bet. BBW's strong cash flow generation from its assets should also deliver solid distribution (dividend) growth over the medium term.
The stock I did want to talk about in this post is JB Hi-Fi (JBH). Various people in the consumer electronics industry I have talked to seem to think this stock still has a lot of upside, despite its stellar run over the last few years. Management seems to be on the ball by delivering or beating expectations - always a good sign.
From a fundamental analysis perspective, like the PEG ratio and low debt levels, things look good as well. The table below shows the earnings forecast for the company with continued growth being expected. JBH management has guided for FY08 sales to grow by a huge 33%! This is due in part to the continued expansion across the Australia-NZ region. Most brokers also rate the stock a buy. I think the continuing growth in sales for HDTV's, Gaming consoles (Wii, Xbox, Playstation) and soon to be introduced iPhone, will be positive catalysts for the company.
The major concern for the stock is a slow down in consumer spending due to a recession or general economic downturn. As a consumer electronics company, they are highly leveraged to discretionary spending and any adverse changes in the economy will reduce the company's earnings/forecasts and the stock will fall significantly. However, I think this company is best of breed in its sector, has low debt, and should be able to whether any slowdown better than its competitors. Best-Buy, an American company, is a similar (but much larger) company to JBH. It is also best of breed in the US consumer electronics sector and despite the slowdown in the American economy and consumer discretionary spending, it has continued to grow. In fact it has shown positive growth for the last 10 years! I think US and Australian consumers have similar wants and spending habits when it comes to consumer electronics, so if JBH can emulate Best Buy, it will be a great stock to have owned.
The stock has dropped around 8% in the last month. I think it will experience some more volatility over the next few weeks until it reports earnings. If you believe in continued growth in the consumer electronics sector (HDTVs, iPods etc) then this is the stock to own.
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