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

Porn Star Breaks Both Legs After Jumping Out Window To Escape Rapists

When porn star Lola Taylor visited an apartment in the Yasenevo District of Moscow to discuss a potential film idea, she never expected to fight for her life. Taylor, née Lyubov Bushuyeva, was allegedly lured to the flat on October 25 by two Belarussians, Dmitry Kosenkov, 30, and Maxim Pilipenko, 33, who claimed they wanted […]

World Emily Arata

Here’s What The Average Man’s Body Looks Like Around The World

The average American male is becoming shorter and fatter every day. As part of digital artist Nickolay Lamm’s 2013 Body Measurement Project, Lamm compared the average body mass indices (BMI) of men in the US, Japan, the Netherlands and France. Using measurements normally related to each BMI, Lamm created a mockup average man for each country. The […]

World Sean Levinson

10 North Korean Officials Killed By Firing Squad ‘For Watching Operas’

North Korean dictator Kim Jong-un had 10 of his officials executed for watching South Korean soap operas, according to South Korea’s intelligence agency. The senior members of the ruling regime were reportedly allies of Jong-un’s uncle, Jang Song-thaek, who was executed in December of 2013 over suspicions that he was trying to undermine his nephew’s power. The […]

Also On Elite

Envision

Daredevils Hack Billboard In Hong Kong To Show Off Insane Climbing Footage

The people behind the YouTube channel On The Roofs are known for ascending insanely high buildings and taking cool, point-of-view photos and videos while atop the structures. They recently visited Hong Kong and created one of their coolest videos yet. In the video, they take an elevator to the top of a skyscraper in the center of […]

Dating

10 Things You Need To Be Sure About Before You Can Say ‘I Do’

I’m young, and when it comes to the topic of lifelong love, it will be an eternity before I feel anything but young in that regard. I will never have all of the answers; marriage is such a unique and complex entity. It starts out as this distant thought that most people think of very […]

Humor

You’ll Never Go In A Garage Again After This Chainsaw Massacre Prank (Video)

VitalyzdTv, one of YouTube’s leading prank channels, shared a video yesterday of what is probably its best and most convincing prank yet: the chainsaw massacre. In honor of Halloween’s upcoming arrival, we’re spreading the fear. The prank is set in a parking garage with a chainsaw “murderer” and his victim, who in some scenes is […]

Life

42 Thoughts That Go Through Your Head While Waiting In Line At Chipotle

Going to Chipotle typically leaves customers with a rush of different feelings, a roller coaster of emotions – if you will. Especially when you go during “rush hour,” which alludes to the windows of operation during lunchtime and dinnertime when it’s, more or less, f*cking mayhem. Chances are, if you step into Chipotle sometime around […]

Envision

The World’s Fastest Ambulance Will Get You To The Hospital In Style (Photos)

Emiratis are no strangers to the occasional sportscar on the street — after all, Dubai is one of the richest cities in the Middle East — but luxury tends to be reserved for the private spheres of life. However, at Gitex, the Gulf’s annual technology event, Lotus cars unveiled a specialty vehicle refitted as an ambulance — […]