Buying RadioShack’s Ugly, Undervalued Stock

Buying RadioShack’s Ugly, Undervalued Stock
News
Like Us On Facebook
Like Us On Facebook

As a deep value investor, I am constantly on the hunt for a bargain — the proverbial “50 cent dollar.” This sometimes means I’m buying names that no one else wants, companies that have admittedly seen better days. It is, indeed, a risky business and not for the faint of heart.

I sometimes refer to it as “buying ugly.” The practice does not always bear fruit, but can be very rewarding when you are right.

You know the story: A formerly solid company puts up some bad numbers, or perhaps is beginning to look like a dinosaur for the times and the extinction process has begun. The stock gets hammered as more investors head for the sidelines, and, before you know it, the company’s market cap is a fraction of its former self. Sometimes, the damage done is warranted. I look for situations where there has been an overreaction, at least in my view.

It’s no secret that the electronics retailing business has been extremely challenging in recent years. We’ve seen big chains like Circuit City go bankrupt. It is a highly competitive business, and the brick-and-mortar stores are having difficulty at the hands of online retailers like Amazon.com (AMZN). We’ve seen Best Buy (BBY) closing stores and laying off workers. Its stock is down 30% in the past year.

The story has been worse for RadioShack (RSH), whose shares have fallen off a cliff. The stock is down 68% in the past year and 58% year to date. This name once changed hands for more than $70 a share, and has fallen below $4.

Truth be told, the company’s best days are, indeed, behind it. But that’s not the issue. The question is whether RadioShack shares are worth more than their current $3.91 price. Even the best companies become overvalued, and sometimes the worst are undervalued. This is not a bet that the company will be restored to its former glory, but rather that its stock, in all its ugliness, is undervalued at current levels. Welcome to the warped mind of a deep value investor.

Admittedly, I did not like RadioShack shares at $7, when it first hit my radar last March. But when shares fell below the company’s net current asset value — a deep value technique devised by Ben Graham that’s calculated by subtracting total liabilities from current assets — I took an initial position. Shares currently trade at 1.01 times NCAV. That’s an indication that shares are either very cheap or that the company is headed for the scrap heap.

Despite its challenges, RadioShack still has a decent balance sheet. The company ended last quarter with $566 million, or $5.67 per share, in cash. It also has $675 million in debt, $375 million of which matures in 2013, while the rest matures in 2019.

As for its monstrous 12.6% dividend yield, I have very little faith that it will be maintained. In fact, I am expecting that it will be eliminated altogether as the company conserves its cash. I did not take a position in the stock for the yield.

While the first quarter was rough, and the company badly missed earnings estimates, RadioShack has still been able to generate 64 cents in free cash flow per share in the trailing 12 months. The market does not believe that will continue. As for the analyst community, the consensus calls for $4.49 billion in 2013 revenue and earnings per share of 38 cents.

Warren Buffett might describe investing in distressed companies such as RadioShack as “cigar-butt” investing. I believe there may be a puff or two left in RadioShack. Much of the investment world sees the company as a “value trap,” and it is priced accordingly.

As a postscript, back in 2003, Circuit City was also trading below NCAV. During the subsequent four years, shares rose nearly 300%. Owning Circuit City in those days was not a bet that the company would survive and ultimately thrive longer term. Rather, it was a bet that shares were cheap at a given point in time.

We’ll see if history repeats itself with RadioShack. It’s certainly not for the faint of heart; only those with an iron stomach need apply.

The Street

Share Tweet
React
Like Us On Facebook
Like Us On Facebook

Julian Sonny

From the sandy beaches of Hawaii, to the streets of New York: Julian has seen it all. His lifetime of travels has given him a broad scope of knowledge and an eclectic taste unlike any other in the tri-state area. Julian has often been compared to cultural icon, The Rock, because of his unequivocal work ethic and warrior-like stature.

More In News

World Sean Levinson

Dick Cheney May Be The One To Thank If We Get An Ebola Vaccine

There isn’t a vaccine for Ebola, but should one emerge, we may have the Bush Administration to thank. Former Vice President Dick Cheney became very fearful of bioterrorism after 9/11, when rumors surfaced that anthrax was going to be hidden in our mail. Later that year, Cheney asked Congress to devote billions of dollars to […]

World Emily Arata

Guy Comes Out To His Friend Via Text, And The Response Is Brilliant

Chances are good your closest friends suspected you were gay long before you worked up the courage to tell them. Such is the case for Redditor ecg006, who finally came out to his best friend in a sort of underwhelming fairytale moment. Sexuality doesn’t change how your true best friend sees you. He’s only concerned with […]

World John Haltiwanger

3 Reasons The Doctors Who Treat Ebola Patients In Africa Are Heroes

Last night, New York City found itself panicking following the first confirmed diagnosis of Ebola within the city. The patient is a 33-year-old doctor, Craig Spencer, who recently returned to the United States from Guinea, one of the countries most heavily impacted by Ebola in West Africa. Spencer had been working in Guinea with Doctors […]

World Emily Arata

Canada Took US Media To School By The Way Ottawa Shootings Were Handled

In the wake of this week’s Ottawa shootings, many Americans find themselves wishing our country covered breaking news the way Canada does. In both newspapers and on television, Canadian media outlets dispelled rumors before taking them public and stuck to the facts. The Atlantic’s Polly Mosendz notes that Thursday’s morning papers showed a previously unseen […]

World Sean Levinson

Woman Lights Roommate On Fire After He Throws Out Her Spaghetti

A Florida woman reportedly set her roommate on fire because he threw out her food. According to Bay News 9, 33-year-old Melissa Dawn Sellers of Clearwater was drinking with her roommate Carlos Ortiz, Jr., 42, when they got into a heated disagreement early Wednesday morning. Sellers threw nail polish remover on Ortiz and, using either […]

Also On Elite

Envision

Parents Dress Up Baby In 31 Adorable Costumes For Halloween (Photos)

Little Noah’s been in this world for less than a year, and he’s already taking Halloween more seriously than you. Noah is the 4-month-old child of New Yorkers Peter and Jessica Chavkin. In celebration of the upcoming spooky day, Jessica began Noah’s Halloween Countdown, a 31-day homage to famous characters. Jessica writes that Halloween is […]

Humor

Guys Act Out The Best Convo Between Middle-Aged Sisters Yet (Video)

I assume that since you clicked on this, you’re familiar with past installments of the Sisters series, in which two guys lip sync conversations between two 60-year-old women. If you weren’t familiar, now you are. Welcome. In the past, the videos have been pretty straightforward: The Kloons set up a microphone for a little while, […]

World

Believe It Or Not, Cuba Is Providing The Most Aid For Ebola Of Any Country

The US has sent hundreds of military personnel to combat the Ebola virus, but when it comes to actual healthcare workers, it’s Cuba that has delivered the most help. Over 160 Cuban doctors and nurses touched down in Sierra Leone last Thursday, the Washington Post reports, the largest medical team from a single country to […]

World

Powerful UNICEF Ad Reminds Us There’s No Vaccine For Violence

Smallpox, polio, tetanus — we have vaccines for these. We even have a vaccine for the flu. Vaccines are made to keep us safe from disease and from death. But what about other threats to our safety? How do we keep those under control? A new ad from UNICEF UK seeks to raise awareness for these […]