The rebound in Dick Smith Holdings Ltd's (ASX: DSH) share price continued on Tuesday with the stock gaining a further 2.5% to 83 cents.
The positive performance was impressive considering the 0.4% sell-off in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) but more importantly yesterday's gains mean the stock has now reclaimed 24% of its price since touching an all-time low of 67 cents at the end of October.
As I explained here, the share price of the electronics retailer went into a tailspin after the company issued a trading update guiding the market to a revised profit range $5 million to $8 million below prior guidance.
The downgraded guidance implies that the profit could come in up to 18% below prior expectations. Considering the stock is still down over 40% in the past month, despite the 24% bounce back would suggest that there is certainly a case for considering the stock as having been oversold.
Investors' Dilemma
The problem investors face with an investment in Dick Smith is determining whether this downgrade represents the low point in earnings for the company, or whether subsequent declines in earnings could still occur…
It's a dilemma no doubt. If earnings have bottomed then there could be further significant upside from this point. Especially considering the undemanding multiple the stock currently trades on both in an absolute sense and also in a relative sense compared with its listed peers JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN).
However, if earnings decline further, then buyers of the stock may find themselves caught in a value trap which would most likely lead to a prolonged weak period for the share price.
