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Is it time to buy BHP Billiton Limited, Dick Smith Holdings Ltd, and Directmoney Ltd shares?

Credit: Lucas Walters

Two of the S&P/ASX 200‘s biggest names hit their lowest point of the decade this week on falling commodity prices. Another household name was smashed down by a shock update, while a young upstart in the peer lending business has seen its shares drift downwards as investor interest wanes.

Based on prevailing market conditions, these companies could have a tough time making back their losses. With that in mind, should you buy shares in:

BHP Billiton Limited (ASX: BHP) – last traded at $18.75, down 39% for the year

The share price of BHP recently hit levels not seen in more than 10 years on the back of sustained commodity price weakness. Indeed, shares in BHP have lost 14.9% of their value in the past ten years. It’s an illustration of just how much the company has grown on the back of strong iron ore demand, as well as the cyclical nature of the resources industry.

Not coincidentally, Rio Tinto Limited (ASX: RIO) shares also hit a new 52-week low this week, and now change hands for $46.92, down 21% for the year and 25% in the past ten years.

Unlike some smaller peers, BHP has the financial resources to stick out the downturn, but until some iron ore and copper supply exits the market I don’t see its share price making a recovery. BHP shares could well head lower in the next six to twelve months.

Dick Smith Holdings Ltd (ASX: DSH) – last traded at $0.35, down 84% for the year

Dick Smith Holdings shares were smashed earlier this week after the company announced surprise write-downs on its inventory, as well as the chilling words:  “Further impairment may be required, depending on Christmas trading. Given the non-cash write-down and the uncertain trading outlook, the Company is unable to re-affirm the profit guidance previously provided.”

Shares have been sold down not only on the write-down, but on fears of future write-downs which could impact cash flow and margins. Managing Director Nick Abboud also stated: “We will continue to drive sales, maintaining flexibility on gross margin to reduce inventory and improve our net debt position.

To paraphrase, discounting will likely be required to clear inventory and drive sales over Christmas. With stiff competition in the form of JB Hi-Fi Limited (ASX: JBH) and an uncertain outlook in the near term, I would not be buying shares in Dick Smith today.

Directmoney Ltd (ASX: DM1) – last traded at $0.095, down 81% for the year

‘Marketplace’ lender Directmoney had a shocking start to listed life, losing just over half its value from a launch price of $0.20 in the past six months.

Despite this, loan book growth has been pleasing, and the company has signed a number of partnerships with finance brokers like Presidian and more recently with Australian Finance Group Ltd (ASX: AFG) which should provide excellent exposure to its product.

On another front, however, I see some indicators that raise an eyebrow. The weighted average interest rate of loans is 13.6% (plus a $575 application fee) which is not much better compared to the starting rates on personal loans offered by big lenders like Commonwealth Bank of Australia (ASX: CBA), although as yet this is over a very small number of loans. DirectMoney may also offer better rates to applicants with better credit histories and rates are offered on a risk-based pricing approach.

Nevertheless as lending growth picks up I wouldn’t be surprised to see the share price re-rate.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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