Buckingham Research Group this week ratcheted up its investment rating from "neutral" to "strong buy" on electronics retail chain Circuit City (NYSE:CC). The report suggests that the struggling company is now on the rebound.

Indeed, Circuit City has the makings of a long-term turnaround story. But at this stage of the game, a strong buy recommendation sounds, well, a bit, er, strong. Circuit City management still has to prove that it can stay competitive and generate earnings.

Despite a rash of hot new products like High Definition TVs and digital cameras, the company is having trouble keeping up with the competition -- notably Best Buy (NYSE:BBY). Best Buy has been virtually alone in its ability to generate sales growth. For December, Circuit City reported a 2% decline in sales from new stores, while Best Buy posted a 9.3% jump.

Unlike Best Buy, Circuit City has changed its strategy several times. First it stopped selling appliances. Then it got rid of sales commissions, and now it's trying to reposition itself as a leading-edge electronics dealer, going head-to-head with Best Buy.

But it's not just Best Buy that the company has to worry about. Chains like RadioShack, (NYSE:RSH), Tweeter (NYSE:TWTR), and Ultimate Electronics (NYSE:ULTE) are fighting for the same customers. Direct sellers of PCs, like Dell (NASDAQ:DELL), are moving into the consumer electronics category. Even more competition is coming from online retailers. Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) sell everything from MP3 players to plasma screen TVs.

In the face of stiffening competition, even tiny top line sales growth will be tough to sustain, and Circuit City knows it. So bottom line growth will have to come from cutting expenses. Circuit City store managers face an uncomfortable -- and potentially disruptive -- cost shake-up.

Management has identified about 200 poorly performing stores that will be closed and relocated. But that job will take time. A shortage of real estate allows for only 40-50 relocations annually. In the short-term, the relocation shuffle will carry high costs.

Disposal of its bankcard business and credit card businesses leaves Circuit City with about $1 billion in cash, or $5 per share. That gives it some price support, but not nearly enough to warrant much upside from today's $11.77 price. Trading at 46 times 2004 earnings, Circuit City looks high enough. Buckingham Research has jumped the gun. Don't do the same. Wait for more solid signs of a turnaround.

Amazon.com and eBay are both among David Gardner's recommendations for Motley Fool Stock Advisor . Since the inaugural April 2002 issue, David's recommendations have returned an average of 71.6% versus the S&P 500's 18.41%.

Motley Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here.