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RadioShack: Are We there yet?

May 12, 2012

My mother used to tell a story about me when I was little that went something like this. The family was setting out for a holiday in the country, maybe a 4 or 5 hour drive away. The parents had prepared us kiddies for the longer-than-usual drive, telling us we’d only get there late in the afternoon (after several rest stops). We’d packed our numerous bags and loaded up the car with snacks, blankets and pillows. But not five minutes into the drive I piped up from the back seat, “Are we there yet?”. I think every parent will commiserate.

Well, you may be asking the same thing about RadioShack.  “Are we there (at the bottom) yet?” After all, the most optimistic outcome laid out in my last post came about; RSH announced an unexpected loss for Q1 and the shares promptly tanked. They’re now priced below $5.00 where I said I might take a full position. Have I? Nope. Not on your life. Why should I? Is any positive news going to come out before next quarter’s earnings release?  What about ‘window dressing’ at the end of the second quarter? Aren’t there a few die-hard institutional investors still holding that will need to bail because the price is below $5.00? And what happens in July  when, more likely than not, they announce a loss for the second quarter?  You should be asking yourself how low can the shares really go? And my answer is …. well not exactly zero, but $2 or $3 is not unrealistic, especially if they reduce or suspend the dividend. Yes, the company is still flush with cash (unless they’ve unwisely been spending it… increased marketing, anyone?). Hey, management, if you’re so darn sure that you can pull out of this nose-dive shouldn’t you be buying in shares hand over fist? Well, are they? Probably not. Anyway, I don’t see it happening. So, let’s just wait and see how bad they really are at capital allocation.

OK, OK, I know I’m just mouthing off here. Maybe management will be able to turn things around this quarter. If so, RSH won’t be the great investment I’m hoping for. I can take it….or, in this case, leave it. I’ll just sit back and wait for the next fat pitch. There’s no umpire to call me ‘out’ in this game.

  1. Ben permalink

    This type of thinking is a great demonstration of speculation: When the analyst has done his work and determined that the price already below intrinsic value, but is speculating on the exact bottom or on what will cause the stock to move up. Even worse, when the analyst had already determined an entry point but is now swayed by greed or fear to not act on his previous conclusion.
    There are an infinite number of events that can cause the stock price to move up:
    The slightest whiff of a buyout rumor or an actual buyout offer is possible.
    The company may announce a large stock buyback program.
    The company may announce a new partnership that adds great value to the company.

    Of course there is no guarantee that a good thing will happen and betting on one would also be speculation. But what we do know is that the stock is fundamentally cheap, and buying stock that are fundamentally cheap will on average provide great returns to investors.

  2. Ahh, dear Ben, I will agree with the last phrase of your last sentence “..and buying stock[s?]that are fundamentally cheap will, on average, provide great returns..”. The rest, I’m not quite sure what you’re accusing me of, if, indeed, you are accusing me of anything. Please, by all means, go off and purchase RSH for your portfolio if you think it ‘s cheap. If you’re so sure it’s below intrinsic value put your whole life savings into it. Don’t let me stand in the way. I certainly don’t think I can call the bottom. Nor, by the way, am I sure what intrinsic value is for the shares. But that’s another story…

    What I was trying to say in my post is that although I believe in regression to the mean, I believe in it GENERALLY, not in each specific case. With the operating results at RSH deteriorating, I have no way of knowinging whether this is something they’ll be able to fix or not and what the timeframe might be. I’m not an expert in retail so I don’t have a good feel for whether the situation is even fixable. Look at Blockbuster. Whoda thunk? But I AM an investor that wants a good return for putting funds at risk. I consider RadioShack quite risky at the moment operationally. Of course, as the share price declines a potential investment becomes less risky. Me, I’m looking to shoot fish in a barrel so I want the share price to decline a lot before I invest. All I wrote was that any potential investor has to consider that the shares could go down to $2 or $3 and the dividend could be cut. Think what you’ll feel like if that happens and you’ve invested at $5 vs. what you’d feel like if you don’t invest and the shares bounce up to $7 or $10. That’s how you need to make the decision. I don’t mind missing out on the bounce. I’d rather be more sure that the investment is a potential 5-10 bagger, given the operational issues. And finally, I usually need to feel a little nausea when considering an invesment of this type.. and I just don’t have that sick-to-the-stomach feeling yet. I’m not quite sure why.

  3. Matt permalink

    “Whenever the debt market collapses, for example, most people say, “We’re not going to try to catch a falling knife; it’s too dangerous.” They usually add, “We’re going to wait until the dust settles and the uncertainty is resolved.” What they mean, of course, is that they’re frightened and unsure of what to do. The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain.”

    Marks, Howard (2011-04-19). The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing) (p. 99).

    Jay, thank you for your analysis and posts. You are right, there are no called strikes.

  4. Rex permalink

    RSH just got a whole lot cheaper this morning after a downgrade alert . Now tading between $3.04 and $2.65.

  5. Enter today on RSH at 2.36 due to enough collateral compare to the market cap of 246.6 millions.
    For this price you have:
    average net income on a 10 year basis of 215 millions usd (nearly a 10 y P/E average of 1)
    Total current asset – total liabilities = 358 millions usd.

    For me, the risk/reward is suffisant to take an initial position.

    If Radioshack is able to find a second breath, it could be a 10 bagger at this price.

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