RadioShack Is Ailing but Not Dead Yet

NEW YORK (TheStreet) -- The ups and downs of buying distressed stocks can be thrilling at times.

These are the companies that most investors have written off, often with good reason. But depending on the ultimate outcome, there are always a few fools or geniuses who see something that few others see, real or imagined, and who are willing to take a risk on a company whose best days are admittedly long past.

I've been on both sides of that equation, the fool and the genius. As an investor, you can learn from both situations -- those that work out and those that don't. I figure that by the time I reach age 100, I'll have it all figured out.

One of the distressed stocks that I continue to own is troubled retailer RadioShack (RSH). I resisted taking a position for a very long time.

As the stock slid into single digits back in 2012 and others in the value community became interested, I still wasn't convinced. Who would want to own an electronics retailer that was seen as a dinosaur by consumers? I didn't, at least at the then current price.

But when RadioShack became a net/net -- a stock trading below its net current asset value -- I took a position. It wasn't that I believed that RadioShack could ever regain its former glory, but rather that the company was valued so cheaply that any signs of life, or improvement, would drive the stock higher. In my view, there was time, given the company's liquidity.

Although the stock showed some life in 2013 trading above $4 as late as this past September, it's been mostly downhill since. Results have not only been poor the last two quarters, but even worse than expected.


On the mildly positive side, the company has been opening newly designed "concept" stores and has continued to shake up management, the latest move the hiring of a new chief financial officer, John Feray, who was formerly senior vice president of finance and strategy for Dollar General (DG).

Last month, RadioShack signed a new five-year financing agreement, totaling $835 million, which should put any current liquidity concerns to bed, at least for now. Of course, the downside here is that the financing did increase borrowing costs.

The stock got a nice boost last week, rising 18% on Wednesday, after it was disclosed that Jamie Zimmerman's Litespeed Management had taken an 8.1% stake in the company. It's a positive to see a hedge fund take such a sizable stake at this point when most investors have given up.

That certainly doesn't guarantee success; it just means that there's another fool or genius out there, a fund manager who is willing to make a sizable investment in a distressed entity, which gives some comfort that you are not the only one who sees value.

RSH Chart RSH data by YCharts

Of course, these situations are fraught with risk; bankruptcy is a possibility, and any positions taken by investors should be relatively small.

We'll see in time whether RadioShack was indeed a value trap and end up at the place where past-their-prime electronics retailers go to die, or whether a renewed, scaled-back and mildly profitable entity will emerge.

At the time of publication, Heller was long on RadioShack.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Heller, CFA,CFP® 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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