Still more thoughts on Radio Shack (RSH)
I’m reading Daniel Kahneman’s wonderful book “Thinking, Fast and Slow” and recommend it to all who are interested in the psychological aspects of investing. As I was reading about hindsight bias, I began reflecting on my analysis of Radio Shack and how I should try to avoid any hindsight bias when and if the moment comes to contemplate a significant investment. It occurred to me that I should perhaps set out my decision tree beforehand so that I will be less influenced by an emotional reaction to new information. Since an important earnings release is scheduled for next Tuesday, April 24, 2012, I thought now might be the time to try a little experiment.
I laid out the superficial part of my Radio Shack analysis in two previous posts. I say superficial because they didn’t explicitly include any of my calculations of intrinsic value. I held those back because I think readers should go through this exercise themselves if they are interested in making an investment. More recently I came across an article in Forbes that has made me somewhat less positive on the company. The article, titled “Radio Shack getting walloped in the US, focuses on Southeast Asia“, noted that the company has big expansion plans for Southeast Asia and has partnered with a Malaysian retailer, Berjaya Retail Berhard to this end. I don’t know it this is true (the part about ‘big expansion plans’; the partnering was previously disclosed) or the author was trying to create story where there really isn’t one. I don’t really believe what the author intimated, but I’m still influenced by it. I don’t want Radio Shack to focus on new business; I want them to focus on fixing the nice little $4 billion business they have here in the US. Any focus on Asia I view as a distraction! But if the Asia investment is on the order of their Mexican investments than the story is simply wild exageration. My guess is that’s what it is, as I didn’t notice that much attention paid to the Asia initiative in the 10K or any subsequent press releases. Even so, the article planted a seed of discontent. See the power of associative influence? I have to remind myself to disregard this kind of influence and focus on facts.
So let’s look at the upcoming earnings announcement. The consensus (of ‘in-the-know’ analysts… some tongue in cheek there!) has earnings at $.05 a share for the first quarter of 2012, down from $.35 in the same quarter last year, with revenues at about the same level as last year, $1.06 billion. It seems to me the company said something about earnings coming in a bit higher than that in the 1st quarter (I vaguely remember $.08 or did I just dream this?), so ‘the Street’ is pessimistic. They should be, after the company’s performance during last couple of quarters. I only worry that the company will beat ‘Street’ estimates. I don’t want them to. I want them to come in at or preferably below ‘Street’ consensus. Yep, I’m looking at a further shakeout. Even though the share price is at its lowest since well before the 2008/2009 financial crisis, I think, to make this a really great investment, we need a further shakeout.. And we need capitulation. Share price under $5.00 so that institutions have to abandon ship. 2Q window dressing here we come! OK so these are my wildest dreams. Maybe it will and maybe it won’t happen. If it doesn’t and the share price rebounds somewhat, then no big position for me in the near term. The upside/downside needs to be 4:1 or 5:1 to get me invested. Remember, even if we do break the $5.00 barrier there is no guarantee that management will be able to right the ship. As I said in my first post on RSH, things could go from bad to worse. New management may simply not be up to it. Is Gooch Steven Day? Only time will tell. There are no guarantees. We’re just hoping for Mr. Market to get really manic and give us (well, me) a better expected outcome. This is all about probabilities, not certainties.
So what is my action plan after the earnings release? No action really, either way. An upside earnings surprise puts this opportunity on the back burner til the next earnings announcement. A downside earnings surprise means watching the tape with possible delight and waiting for a further selloff at the end of the quarter. There! I’ve let the cat out of the bag! Now you know my strategy. And, yeh, so what? It’s not like I’m going to move the market with my inaction. I’m just laying this out so that, in retrospect, I can read about what I was thinking beforehand. How’s that for convoluted. Anyway you get the gist. Sometimes you need to do a hindsight bias test to see just how uninsightful you are. This is my little test and you’ll all be privy to it.