RadioShack – Don’t Chase a Penny Stock Turnaround Story

by Kyle Woodley | August 5, 2014 11:03 am

RadioShack (RSH[1]), once a legitimate retail holding, has become another penny stock bomb just waiting to go off in your portfolio.

We’ve long tried to warn investors about the danger of penny stocks[2]. They’re often thinly traded (making them difficult to sell once you own), prices are rarely accurate, they can be easily manipulated (often illegally). In some cases, they don’t even have viable businesses[3].

Still, investors flock to these penny stocks, and read about them constantly, because of the hopes that they’ll explode overnight and provide doublers, triplers and well beyond.

But what happens if the penny stock you’re researching is a tried-and-true business, just a little down on its luck? Heck, you’ve actually been in the company’s stores, so you know it’s real. Plus, it trades a few million shares every day … you can trust it, right?

Nope.

RadioShack is just as dangerous as any other penny stock. It just has different twists and turns.

How Low Has RadioShack Fallen?

As far as RadioShack’s demise is concerned, the writing has been on the wall for years.

On one side, bigger brother Best Buy (BBY[4]) competes on sheer scale and services. On another side, massive retailers like Walmart (WMT[5]) and Target (TGT[6]) tear at RSH by entering the consumer electronics fray, selling the same games, TVs, cameras and gadgets that RadioShack does, with the added convenience of all their other offerings (clothes, groceries) around them. And on yet another side is Amazon (AMZN[7]), which plays lowball and drives margins for consumer electronics through the floor.

Those forces have smacked RSH stock down from all-time highs in the upper $70s back in 1999 to penny-stock status currently. This year alone, RadioShack has plunged from around $2.60 to just 60 cents today — a 75% decline.

But this market isn’t punishing some wildly overpriced company, unable to fully comprehend the inherent value of RSH stock. This market is watching RadioShack walk a very clear path to insolvency.

From Global Credit Research[8]:

“RadioShack’s deteriorating liquidity gives the company a limited window for executing a turnaround in sales and earnings, says Moody’s Investors Service in the report ‘RadioShack Liquidity Runway May Not Be Long Enough for a Turnaround.’ Moody’s says that liquidity is adequate for another year, with no debt maturities coming due, but that its base case scenario for RadioShack has the company running through its liquidity by the end of October 2015.”

Put more simply: Moody’s Investors Service believes RadioShack will have enough cash to get through the next year. That’s about it.

Why RSH Is Doomed

As mentioned before, RadioShack’s business has been in decline for years. Revenues, which similarly have been in free fall, are expected to drop to from $3.43 billion last fiscal year to $3.09 billion in FY2014, then to $2.97 billion in FY 2015.

Slumping sales are one thing, but RadioShack also hasn’t posted a quarterly profit in more than two years.

And yes, companies can survive extended bouts of losses. But those companies typically are startups that are showing revenue growth, which makes investors believe in eventual profitability, or they’re large, cash-rich companies that can keep pouring resources into the business until a turnaround finally materializes.

RadioShack is neither.

RSH has about $62 million in the bank, is burning cash faster than it can raise it, and its fortunes seem so grim that a life-saving loan is increasingly out of the question. Worse, RadioShack’s current lenders refused to agree to a plan that would have allowed RSH to close some 1,100 stores to cut costs.

Meanwhile, RSH stock’s descent below $1 per share has prompted an automatic warning from the New York Stock Exchange that it could be delisted in six months. See, share price is one of several criteria that companies must meet to remain listed on the NYSE, and while nominal share price typically doesn’t matter, both the NYSE and Nasdaq consider a sub-$1 share price to be one of several red flags concerning a company’s viability.

If the NYSE is worried about RadioShack, you should be too.

Sure, companies have been delisted and recovered. Real estate investment trust General Growth Properties (GGP[9]) filed for bankruptcy during the financial crisis, but exited in 2010 and jumped from mere pennies per share to current prices around $23. But GGP is a highly anomalous exception, not the rule.

And considering the very real near-term risk of bankruptcy — ergo, watching an investment in RSH go to zero or near zero — that’s not the type of risk most investors should be taking, anyway.

Bottom Line

There are literally thousands of companies traded publicly in the U.S. in which you can invest. Of those, can you think of at least 10 that aren’t on death’s door — that actually have significant cash in the bank, or have posted a profit sometime since early 2012, that aren’t looking to close a quarter of its retail outlets, or that operate in industries with more growth prospects than brick-and-mortar electronics retail?

Of course you can. And you should invest in every one of those before you put a penny into RadioShack.

Kyle Woodley[10] is the Deputy Managing Editor of InvestorPlace.com[11]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[12].

Source URL: https://investorplace.com/2014/08/dont-buy-radioshack-rsh-stock/

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