What do you do when a hard-pressed share looks like its starting a recovery? Could it be the start of something profitable, or a so-called 'dead cat bounce'?
Back from the dead?
Dixons Carphone(LSE: DC) has stormed back from the ruins of the old Dixons Retail. From near collapse in early 2012, the company has seen its share price more than treble to today's 389p. That includes a 4% boost today, after the release of a first-quarter trading update.
Revenue is up 9% over the first quarter of last year, with an impressive 4% rise on a like-for-like basis. And while strong UK revenue might seem like the ideal response to the EU Brexit vote, revenue from Southern Europe has actually soared by 13%, largely driven by performance in Greece.
In fact, chief executive Seb James told us that "thus far [we] continue to see no detectable impact of the Brexit vote on consumer behaviour in the UK," so the drop in the shares immediately after the vote doesn't seem to be supported by any actual evidence.
Despite the strong share price recovery of the past three years, we've actually seen a fall back of 25% since the end of December 2015, presumably at least partly due to profit taking by those who successfully got in on the way up. But is this the end of the growth or merely a pause that gives long-term investors a short-term buying opportunity?
With further earnings growth still on the cards and the shares on modest P/E ratings of 13 for this year, dropping to 12 next, I'd say the latter.
Is it too late?
By contrast, I'm less impressed by the recent recovery at online shopping firm Ocado(LSE: OCDO). Ever since flotation, the shares have been up and down as the markets have failed to square the firm's valuation with the profits it's likely to actually make -- and after a peak of over £6 in early 2014, the shares have crashed to today's 317p.
Having said that, since Brexit madness day on 27 June, Ocado shares have actually put on 56%, so we're faced with a similar question -- is this short recovery indicative of something longer and better to come? Sadly, in this case I think not, and the erratic shares are actually down 2.5% today.
Ocado is, on the face of it, doing fine. At first-half time earlier this year, we heard of a 15% rise in revenue and a 5.7% rise in EBITDA, and the firm reckoned it will keep on growing profits at a fast pace. And after Ocado's first profit in 2014, EPS grew strongly in 2015 and there's a further two years of good growth forecast. So what's the problem?
For me it's the current valuation, which puts the shares on forward P/E multiple of an eye-watering 152! And that would drop only as far as 123 on 2017 forecasts. We'd need to see earnings multiplying around tenfold to bring that back in line with the FTSE average, and that would take a very long time to achieve organically. The only alternative I can see is rapid equity or debt-funded expansion, and that would dilute current shareholders' interest.
Or maybe shareholders are hanging on in the hope of a takeover? Maybe, but I wouldn't touch Ocado right now.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.