Sometimes stocks are cheap for some very good reasons, no matter how much any sell-off appears to be overdone. Just look at RadioShack (NYSE:RSH). The troubled consumer electronics chain is a glaring example of a sucker’s bet for anyone not paid to trade stocks professionally.
Shares in RadioShack jumped more than 14% to $2.38 at one point Tuesday after an Bank of America (NYSE:BAC) Merrill Lynch analyst upgraded the stock to buy from underperform, citing, in part, valuation.
The stock is no doubt beaten down, having lost more than 80% in the past year, with the selling only accelerating after RadioShack ousted its chief executive and the stock was kicked out of the S&P Mid-Cap Index.
It also hasn’t helped that RadioShack pulled its dividend, suspended its share repurchase program and said it will no longer issue financial guidance.
After all, these sorts of developments are usually symptomatic of a company that’s circling the drain.
But price is what you pay and value is what you get, and after crunching the numbers, Merrill Lynch analyst Denise Chai sees value in the name. In a note to clients, she writes:
“With the market cap equivalent to just 20% of inventory and accounts receivable, over $1 billion of liquidity and potential for new leadership to take action, we see opportunities for upside and lift our 12-month price outlook to $2.50 ($2 prior), representing a price/sales ratio of 0.05 times.”
Hey, it’s a gutsy, contrarian call. And considering that even at $2.50, the stock still would sport a price/sales ratio of just 0.05 … well, shoot, that does look cheap.
Unfortunately, after the Merrill Lynch-inspired rally Tuesday, there’s now just 10% implied upside left in the analyst’s price target — making RSH’s risk-reward equation suddenly a whole lot less attractive.
And, more importantly, traders trade, but investors invest, and the key to finding value over time frames longer than milliseconds — to say nothing of years — is earnings.
Of which RadioShack has none.
Sure, that price-to-sales ratio might look good, but the price-to-earnings ratio? There isn’t one, because the company is forecast to post steep losses this year and next. Indeed, its long-term “growth” forecast stands at -44%. And that represents an acceleration of losses from the previous five-year period.
RadioShack’s problems are myriad, as InvestorPlace assistant editor Marc Bastow has documented repeatedly. The old brick-and-mortar electronics retailing model is getting clobbered by heavy discounting from the likes of Wal-Mart (NYSE:WMT) and cheaper online competition in the form of Amazon.com (NASDAQ:AMZN).
Sales are getting weaker, while margins are even worse. Let’s face it: The new management team will need a Hail Mary to turn this thing around. As Fitch Ratings said Monday: “There is a lack of stability in the business and no apparent catalyst to stabilize or improve operations.”
Merrill Lynch’s $2.50 price target could very well come to pass — but that doesn’t mean you should chase it.
Leave RSH to the pros and the algos. Unless you’re reading this post on a monitor abutted by at least one Bloomberg terminal, this stock is not for you.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.