I have a term that describes taking positions companies such as RadioShack: "buying ugly." It applies to situations where a company is past its prime, in jeopardy, and the markets throw in the towel, expecting bankruptcy in the near future.
With everyone rushing to the exits, the stock price gets hammered well below intrinsic value (in the eye of the beholder, anyway). If there's any life left in the name, any sign of a potential turnaround, or that perhaps bankruptcy is not as imminent as once thought, the market ultimately admits its "mistake," and investors show renewed interest. Some liken the practice of buying such companies to "dumpster diving," but as a deep value investor I see it as trying to identify and buy "50-cent dollars."
Investors love shiny objects, the Facebooks ( FB) of the world -- the hot, exciting new products and services that everyone is using. The problem is that from an investment perspective, a great company does not always equate to a great stock. Facebook may be seen as one of the great innovations of this era, but if the stock is trading at twice what it's worth, why would you own it? Now, I'm not picking on Facebook; I'm just trying to make the point that there's often a disconnect between stock price and value. In RadioShack's case, the question is not whether the company will ever regain its former level of prominence in the electronic retailing space; I certainly don't believe it will. The question is whether there's some life left in the name, how long management has to scale the company back and what it's actually worth at this point.
From a "value" perspective, RadioShack currently trades at 1.6 times net current asset value, and 0.79 times tangible book value. I started taking a position when the company was a "net/net" (trading below net current asset value), and I have been pleased with the results so far. But be forewarned, "dumpster diving" is not for everyone. Although the rewards can be significant when you are right, the risks can be huge. At the time of publication, Heller held shares of RSH. Follow @JonMHellerCFA This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.