RadioShack Signs of Life?

NEW YORK (TheStreet) -- It may be hard to believe, but one well-known name was up 22% yesterday on five times its normal average volume; and it wasn't Apple (AAPL), Netflix (NFLX) or Facebook (FB) . It was none other than RadioShack (RSH), a well-past its prime company that finally showed a little life after a free fall of massive proportions. In fact, whenever I hear Tom Petty's song "Free Fallin' " I can't help but be reminded of RadioShack.

Companies often get hurt for good reasons; in RadioShack's case it's been declining revenue and margins resulting from very stiff competition in retail electronics. Net profit margins that were in the 5-plus% range fell to 1.6% in 2011, and are now negative on a trailing 12 months basis. Free cash flow, which has been positive for several consecutive years, has also gone negative on a trailing 12 months basis.

This was a company that has been difficult to be interested in. As shares fell from the $23 range in October 2010, to $7 the following March, I began to see other value investors becoming intrigued, and taking positions. It simply was not "cheap" enough for me at that point. My view of RadioShack was still sour; I viewed it as the older style electronics store that I'd rarely, if ever, set foot in.

RSH Chart RSH data by YCharts

My view on the stock changed when the "unthinkable" happened; it began trading below its net current asset value over the summer. I've been researching and writing about net/nets for many years now, and RadioShack is probably the most prominent name that has ended up in net/net land, a veritable scrap heap of down-trodden companies.

Buying a company below NCAV is no guarantee that you will see upside, but it can be an insanely cheap valuation; especially if the company is able to stop the bleeding, or show some signs of improving fundamentals. RadioShack becoming a net/net meant that many investors had simply given up on the company.

When everyone else is selling, companies can sometimes be punished too severely. That was my take on RadioShack. But this type of investing, which has been described as "dumpster-diving" is not for everyone. RadioShack's downward spiral is an indication that some believe the company will eventually go bankrupt. When that happens, stockholders typically get nothing.

Despite yesterday's move, RadioShack is still a net/net, and trades at about 0.93 times net current asset value. As of the latest quarter end, the company had $546 million or $5.45 per share in cash. However, there is also $749 million in debt, and that's one of the issues that has investors skeptical about the company's future. Still, RadioShack's enterprise value is just $523 million. I'm not sure there are any suitors interested in taking the company over, but it remains a possibility

Yesterday's move comes on the heels of an upgrade by Zacks, and the termination of a deal that RadioShack had with Target ( TGT). The relationship had been unprofitable, so this was seen as a positive move.

Where we go from here remains to be seen; but there will be quite a bit of attention paid to the company's fourth quarter results, which are scheduled to be released on Feb. 18. The consensus is calling for revenue of $1.37 billion, and a loss of 5 cents per share. I don't normally pay much attention to a single quarter's results, but this one will be important.

At the time of publication the author is long RSH.

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

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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