The recent new 52-week high hit by Reject Shop Ltd (ASX: TRS) is a reminder to investors that accurately identifying an undervalued, out-of-favour stock can produce exceptional investment returns.
After having its share price slammed in early 2014, the share price of Reject Shop continued to trend lower and hit a nine-year low near $5 a share earlier this year. Since hitting this low however, the stock has rallied over 100% and is now approaching $11 per share.
While shares in Reject Shop may now be trading much closer to fair value there are other retailers which could still possibly be undervalued. Here are three to consider…
Dick Smith Holdings Ltd (ASX: DSH) – shares in the electronics retailer are down 37% in the past year and trading at a 52-week low. With management having provided guidance that it will "deliver further profit improvement" in financial year (FY) 2016 and a price-to-earnings (PE) multiple of just 8x (based on FY 2015 earnings) there could possibly be value here.
Godfreys Group Ltd (ASX: GFY) – it hasn't exactly been a stellar run for the vacuum retailer since floating on the ASX last December. The share price of Godfreys is down 12% since it began trading, while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up nearly 2% over the same time frame.
Based on forecasts provided by Thomson Consensus Estimates the group should earn 33.2 cents per share (cps) this financial year; with the share price at $2.50 this implies a lowly PE ratio of 7.5x.
JB Hi-Fi Limited (ASX: JBH) – in stark contrast to the share price performance of peer Dick Smith over the last 12 months, JB's shares have rallied 26% and are currently trading well off their 52-week lows.
With a consensus forecast for earnings per share of 144 cps this year, the stock is trading on a forecast PE of 12.8x. This obviously isn't as "cheap" on an absolute basis as Dick Smith and Godfreys, however taking into account the business quality, growth expectations and the fact it also trades at a discount to the wider market it could be appealing at these levels.
Buyer Beware
Of course, while these three stocks might look "cheap" just as Reject Shop did when it hit a nine-year low, the collective intelligence of the market shouldn't be underestimated and investors who buy the above three retailers need to satisfy themselves that in these instances they are right and the market has it wrong.
