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 Emily Arata

Besides Being Delicious, Bacon Could Be Essential To Stopping Nosebleeds

The next time you have a nosebleed, forget the tampon. Stick a piece of cured ham up your nostril. Dr. Sonal Saraiya and her team at the Detroit Medical Center received an Ig Nobel Prize for ending a child’s unstoppable nosebleed by pushing strips of cured meat up his nose. The boy suffered from Glanzmann’s thrombasthenia, a condition […]

World Sean Levinson

Earth’s Population Could Possibly Reach 12 Billion People By 2100

A research team from the University of Washington has predicted Earth’s population to exceed 12 billion by the year 2100. Statistician and sociologist Adrian Raftery and his 13-member crew arrived to their conclusion after analyzing UN data regarding rates of fertility, death, migration and aging. The results yielded significant uncertainty on many levels, saying we […]

World Emily Arata

Pabst Blue Ribbon Will Be Sold In Russia, And Now There Will Be Even More Hipsters

In dimly-lit dive bars across the country, the American hipster is weeping. Pabst Blue Ribbon beer was once the refreshment of blue-collar workers before becoming the unofficial drink of the young hipster movement. Today, Eugene Kashper of Russia-based Oasis Beverages announced the sale of Milwaukee-based Pabst Brewing Company. PBR is a 170-year-old brand that stretches […]

Also On Elite

Women

23 Reasons Why You Should Never, Ever Take A Nude Pic Again

*This article is satire. The views expressed are the author’s, and do not reflect the official position of Elite Daily. By now everyone has heard about the celebrity naked picture hacking scandal. Its victims included Jennifer Lawrence, Kate Upton, Victoria Justice, Mary Elizabeth Winstead, Ariana Grande and Kirsten Dunst. If this isn’t enough reason never to send […]

Technology

Shallow Dating Site Now Launching ‘Adopt An Ugly Person’ Mentor Program

It can be difficult to navigate the world of dating websites. Between OKCupid, Tinder and whatever else is out there, how does anyone know which site to sign up for? Well, one group of people have it easy: the best looking ones. BeautifulPeople.com, a 5-year-old website managed by Greg Hodge, is a dating site catering exclusively […]