What: Dick Smith Holdings Ltd (ASX: DSH) soared 7.1% on Tuesday to finish the trading session at 75.5 cents, and added another 6% in early Thursday trading. The rally in the stock comes after heavy selling occurred in the electronics retailer last week when the company advised the market in a trading update that its profit result for the current financial year could be between $5 million and $8 million below the previously forecast guidance of $45 million to $48 million.
So What: Having touched an all-time low of 66 cents last week, investors who managed to pick the bottom are currently sitting on a tidy gain of 19%.
The question for investors to ask themselves now however is whether the sell-off has been overdone and hence could the shares continue to rally or is the stock destined to remain at current levels until a turnaround in its business operations is clearly established.
Now What: Compared with peers such as JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN), Dick Smith's share price certainly looks cheap.
Based on historic data provided by Morningstar, Dick Smith is trading on a price-to-earnings (PE) ratio under 5x; meanwhile JB Hi-Fi and Harvey Norman are on PEs of 13x and 16x respectively.
That pricing discrepancy could certainly be tempting for value investors, however, conservative investors may be best off avoiding this opportunity for now on the basis that it could be a value trap.
