Thursday, November 10, 2011

hhgregg: Now A Much Fairer Price

Just over three months ago, hhgregg (HGG) was featured on this site for its ridiculously low price. Recently, it could be sold for 40% higher than its July price, and 70% higher than its low in October! As such, hhgregg is the latest stock to move from the Stock Ideas list to the Value In Action page. There are plenty of lessons to be learned from this value opportunity.

First of all, stock price volatility is good. Many investors loathe volatility, but really they should love it, as it gives them the opportunity to buy stocks at very low prices. A profitably growing company with tons of cash that trades at a P/E of 8 (as hhgregg was a few months ago) usually makes for a great investment. Today, hhgregg now has a net debt position and yet can be sold back to the market at a fair P/E of around 14. Investors who can take advantage of this stock price volatility will benefit!

Second, investors can make even better returns by buying more when prices fall further. Though hhgregg was cheap at $11.70, it was even cheaper at $9.50. While many investors think the sky is falling when prices drop, those who average down and/or increase their position sizes as holdings get cheaper made out with extraordinary returns.

Finally, investors should avoid being influenced by Mr. Market. Do your own analysis, and don't be swayed by the sentiment that is likely causing the prices to be low. Following my original article on hhgregg, I received comments such as "...this will be another Circuit City without a good name to sell off in bankruptcy" and "Do you think that 67% of the float being short is a good thing??" and "brick and mortar electronics retail is screwed".

hhgregg may still be undervalued, but it is certainly much more fairly valued than it was a couple of months ago. As such, the capital from this transaction is likely better allocated to other stock ideas.

Disclosure: No position


Iowa said...

Amen Saj. Though there's possibly growth for the company in the future, I found it hard to identify their moat and ability to keep that. Unless catastrophic events occur, a lower price will find me a shareholder again.

Anonymous said...

Saj.. nice work on this one, particularly given recent developments.