Is this cheap stock too good an opportunity to miss right now?

Jabran Khan decides if he would invest in this cheap stock or avoid the trap of buying a stock that may be doomed.

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Halfords (LSE:HFD) currently seems like a cheap stock to me. Here I take a closer look to determine whether should I add the shares to my portfolio.

Retail giant

Halfords is the UK’s leading retailer of automotive and cycling products. With over 10,000 employees at more than 750 locations, Halfords is a retail giant with an online presence too.

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When the pandemic began the number of bicycle enthusiasts grew substantially. Halfords saw its demand for bikes explode but it has been unable to keep up with demand. As the economy has reopened, it has been reported that road traffic has surpassed pre-pandemic levels. This may be bad for the environment, but it is good for Halfords. I think it means more people will require its goods and services. 

As I write, shares in Halfords are trading for 282p. A year ago, shares were trading for 226p, which is a 24% return. I class Halfords as a cheap stock as the share price has tanked in the past few months from 435p per share in July to current levels, a 35% drop.

I believe the Halfords share price has tanked due to its inability to keep up with rising demand for bikes, making it look like a cheap stock. The supply chain and haulage issues the UK has been experiencing hasn’t helped either.

For and against

FOR: I believe Halfords’ size and profile offers it a competitive advantage. On its website, Halfords states, “90% of the UK is never more than 20 minutes away from a Halfords shop or Autocentre”.

AGAINST: Halford’s inability to keep up with demand for bikes as well the haulage and supply chain crisis linked to Brexit does worry me. Some commentators believe it could be a short-term problem, but there are worrying signs that the issues are not close to being resolved.

FOR: Halfords has an excellent track record of performance. I understand that past performance is by no means a guarantee of the future but I use it as a gauge. I can see that revenue and gross profit have increased year on year for the past four years. Also, Halfords was deemed an essential retailer, meaning it remained open when others were forced to close during lockdowns. If further restrictions came into force, Halford’s bottom line would not suffer.

AGAINST: Another worry for Halfords could be that as the economic reopening continues, consumers’ love for cycling and leisure products could tail off. Consumers could be eager to book holidays once more and spend their money elsewhere.

Cheap stock or value trap?

Overall, I believe Halfords would be a good buy for my portfolio at current share price levels. It is trading at a forward price-to-earnings (PE) ratio of close to 10, which is cheap as chips right now. It has a positive track record to back it up and an excellent presence across the UK. I do believe the supply chain crisis will ease, but I expect short-term pain for Halfords to continue as the issues are ironed out. Right now, Halfords looks a bargain buy for my portfolio.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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