Surviving RadioShack in a Wal-Mart World

NEW YORK (TheStreet) -- If you're a current RadioShack (RSH) investor, Wednesday's earnings release must have you wishing you could avoid your computer Thursday. I recently sold put options in RadioShack, so I share your frustration.

RadioShack has lost about 29% of its market cap from Tuesday's close. The loss in share price is primarily from the surprising earnings miss and loss.

I'd like to think the announced dividend cut didn't drive the price lower. A dividend cut was all but certain and as I sold the put options I knew the odds were high the dividend was on the endangered species list.

Today's move didn't break through any support levels because there are none. The next area of support to watch is $0 (yes, zero). The widely watched 200-day moving average doesn't come into play until $7.70.

RadioShack is oversold on the daily and the weekly charts, but without a support level it's make or break time.

RadioShack CEO Jim Gooch stated:
We were disappointed in our gross margin rate performance, as the initiatives we have under way have not yet generated enough momentum to improve the trend.
...(L)et me move over to the performance for the quarter. As I said, the profitability was below our expectations. Gross margin was a significant issue, largely driven by the profitability in our Mobility business.

Insiders reportedly sold no shares in the last six months. Insiders were not buying either, but since they only hold a million shares, it's not clear management believes in the stock.

( TheStreet's Tim Melvin provides his opinion on four stocks including RadioShack in his article High on the New Lows.)

As for RadioShack's competitors, the soft economy is allowing Wal-Mart ( WMT) and Target ( TGT) to execute well, and both are trading higher with conviction from a year ago.

Wal-Mart revenue year-over-year has increased to $446.95 billion in fiscal year 2012 compared to $421.85 billion in the previous year. The bottom line has falling earnings year-over-year of $15.70 billion in the last fiscal year compared to $16.39 billion in the previous year.

While Wal-Mart earnings have declined, the rising revenue has to come from somewhere, and somewhere includes RadioShack.

Wal-Mart has appreciated 34.6% in the last year, and the average analyst target price for Wal-Mart is $67.64.

Target's last quarterly earnings release was May 16, and the previous closing price was $55.32. The current price of $60.36 is higher by 9.1%. No surprises why, the top and bottom lines tell the entire story.

Target investors have been rewarded with an increase of year-over-year revenue. Revenue reported was $69.87 billion last fiscal year compared to $67.39 billion in the previous year. The bottom line has rising earnings year-over-year of $2.93 billion last fiscal year compared to $2.92 billion in the previous year.

Like RadioShack, and unlike Wal-Mart and Target, Best Buy ( BBY) is struggling. The nationwide electronics retailer is contending with Amazon ( AMZN) right along with RadioShack.

At least up until now, shareholders have not punished Amazon's inability to produce meaningful profits. I believe that will change sooner or later, but for now Amazon gets a free pass on making profits.

Revenue for Amazon year-over-year has increased to $48.08 billion last fiscal year compared to $34.20 billion in the previous year. The bottom line has falling earnings year-over-year of $631 million last fiscal year compared to $1.15 billion in the previous year.

Profit of $631 million sounds like a lot until you have to divide it up among 450 million-plus shares. I believe Amazon is overpriced, but that doesn't help RadioShack right now.

Based on my experience with gap-downs following earnings misses, RadioShack investors will see short-term lows Thursday or Monday. Wednesday's open near the high of the day suggests investors are not going to stampede to their brokers and buy all the shares they want to buy.

Bargain hunters and short-sellers covering positions could push the price up quickly in relation to the gap-down price this week.

Looking at the chart, I expect short-term resistance near $3 and again at $3.50. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of bargain hunters to start positions under $2 as an entry.

RadioShack doesn't have oversized debt relative to the cash on hand and the price-to-earnings multiple is reasonable unless the losses continue.

If you were looking for Wednesday's drop to signal a buying opportunity, you may find the end of the day Thursday or opening on Friday a better time. There is no hurry jumping on board with RadioShack. Stocks dumping as a result of misses like this one take one or two good earnings quarters to recover.

RadioShack has such a schizophrenic history with earnings, this is almost par for the course. Take your time and do your homework before allocating capital here. Look for the second break above $3.50 as the one that "sticks."

What's the best play with RadioShack? There should be a very attractive trade coming up Thursday and or Friday. Near the end of the day, if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.

It's not one to get greedy with; hold on for a few days and as the implied volatility falls (hopefully with a nice dead-cat bounce) exit out with a quick hit and run for profits.

Otherwise, for longer-term investors the best play is to wait until we are closer to the next earnings release for an entry.

For now I am hanging on to the put options I wrote and will have the shares put to me next month. Admittedly I am not a RadioShack shopper; however, the shares are priced like never-ending options. If management can deliver, a three or four bagger is a real possibility.

At the time of publication, the author was long RSH.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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