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Trade of the Day: DSW Inc. (DSW)

Wunderlich recently initated coverage on DSW


One stock with a fascinating chart right now is designer shoe retailer DSW Inc. (DSW). Look at the year-to-date chart and you’ll see a stock that fell off a cliff over the winter and is down more than 26% in 2014. But look at the one-month chart and you’ll see a gap up in a company looks to have recovered its traction, so the shares are shaping up as both a rebound from a long-term decline as well as a shorter-term momentum play.

DSW’s second-quarter results beat consensus estimates by $0.05, and the stock was rewarded with a flood of buy orders, bidding it up to a heady $32.67 in early trading before closing at $30.99. A few analysts now think DSW can justify a price as rich as $37 over the next year simply because expectations and operating performance were reeled in so extensively in the last few months. DSW opened 2014 well above $43, so there is a lot of ground left to recover.

The question is how much of that ground DSW deserved to lose in the first place. Back in January, Wall Street thought expected fiscal year earnings of $2.17 per share could support the price action, only to be disappointed by a steep dip in both the quarterly numbers and the guidance. By May, management was only confident in guiding toward maybe $1.45 to $1.60 per share, which meant some serious re-rating was required.

But now, guidance is edging up again as shoppers come back to DSW stores, traffic picks up on the company’s website, and consumer confidence just hit another seven-year high. If management can hit its marks, this stock should have a nice base to explore its ultimate upside. While I think $37 over the next year is too ambitious for trading purposes, DSW’s chart seems to support a test of $34 to $35, which is where it traded in May before the disappointing first-quarter earnings were released.

Since earnings, DSW appears to have found a “new normal” here around $30 and looking up for its next move. Technically, the stock is no longer overbought, but the chart still has momentum to work with – and as news flow cooperates with announcements of new stores around the country, traders who are now just finding out about this stock have plenty to work with here too, so you can feel comfortable going long DSW at current levels.

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