Ugly Radio Shack Has Beautiful Bones

Editor's note: Jim Cramer told viewers of his "Mad Money" TV show on Tuesday that Intuitive Surgical (ISRG) and Potash (POT) are two ugly ducklings set to become beautiful swans. Here's another stock with those same characteristics.

NEW YORK ( TheStreet) -- Beauty truly is in the eye of the beholder, and as a value investor, I sometimes take positions in names that appear downright ugly to many investors. I will buy the "ugly ducklings" because I sometimes see what others don't.

On the other hand, sometimes others don't see what I do, because it's all a mirage, and my investment thesis is just plain wrong. But that's par for the course, at times, and the hope is that you are right more often than you are wrong.

This strategy is not always about buying names that have fallen on hard times, but have bright futures. It's often about buying names that have been so beaten down, that their prices have fallen well below the value of their ugliness. If they have a future, well, it may not be that bright. But the market believes that there is no future, and prices the stock accordingly. I can think of no better example than RadioShack ( RSH), which had been all but written off last December, as the stock price dipped below $2. Here was an antiquated retailer (strike one), in the retail electronics business (strike two), with falling revenue, declining margins and substantial debt (strike three, four and five). There was little to like, given the numerous retailer troubles we've seen in recent years, especially in the electronics space.

RSH Chart RSH data by YCharts

I resisted RSH for quite a while as the stock price continued to decline, and the dividend grew fatter; a dividend that I knew needed to be eliminated, which it was. Finally, when the stock became a net/net (trading below net current asset value), I started taking a position, and have added along the way as the price fell further.

The good news is that RSH has been a big winner so far this year, and is up 69% year to date, and that includes a 15% pullback since mid-May. The stock is still universally disliked, however, and certainly not out of the woods. But there have been some positive changes in recent months, including a new CEO, Joe Magnacca, who had success at drugstore chain Duane Reade, prior to becoming an executive VP at Walgreens ( WAG).

After joining the company in February, Magnacca gave himself 100 days to put together a revival plan to present to the board of directors. The company also ended a mobile phone partnership with Target, which ended up being a low-margin disaster for RSH.

RSH certainly has its work cut out for it, but the buzzards have stopped circling, at least for now. The company currently trades for 1.38 times net current asset value, an extremely depressed valuation, and .68 times tangible book value per share. While there was ample cash at the end of the first quarter, $435 million or $4.36 per share, that will probably continue to decline as the company attempts to right-size itself. There is also ample debt, $712 million, which will need to be addressed.

RSH Long Term Debt Chart RSH Long Term Debt data by YCharts

I expect that we'll learn more about the progress of Joe Magnacca's "100 day plan" when the company reports second-quarter earnings next month. Consensus expectations appear to be fairly low, with revenue of $814.7 million, a 22% decline from last year, and a loss of 23 cents per share.

This ugly duckling has performed very well so far this year, and has shown some progress, but there is still much work to be done.

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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