Since the last day of trading of March, Sprint Corp. (NYSE:S) shares are up 5%, a byproduct of accounting tricks and a renewed interest in the telecommunications sector. Much of the latter is driven by RadioShack Corporation’s (OTCMKTS:RSHCQ) financial near-death experience, a forced liquidation that was saved at the last minute by hedge fund Standard General LP and Sprint.
According to a recent article by The Wall Street Journal, RadioShack stores will reduce excess space-hogging inventory and focus on popular — and far more profitable — accessories such as chargers, batteries and speakers.
Not unexpectedly, the embattled retailer’s chief executive officer, Joe Magnacca, resigned last week after failing to spark the turnaround the organization desperately needed.
The revamp has its criticisms; namely, that the stores formerly under dilapidated RadioShack’s control lack the sex appeal of other electronics-centric stores. Further, the typical square-footage of its brick-and-mortar locations limit the type of products it can sell to customers. Nevertheless, Sprint will have a strong marketing presence in more than 1,400 locations, and its products will consume about one-third of each individual store.
Not insignificantly, the mobile carrier will also staff its territory with its own employees.
On a granular level, Sprint’s equity valuation is receiving additional help due to a change in accounting methodology for the company’s new leasing program. According to Citigroup analyst Michael Rollins, Sprint is expected to report higher OIBDA, or operating income before depreciation and amortization, but at the expense of rifling through “significant” free cash flow over a two- or three-year period.
Of course, Sprint stock can’t live on amortization alone. Whether agreeable or not, market dynamics ultimately operate on human psychology and for Sprint, there may be a substantial boost in sentiment that will drive valuations closer to the consensus price target of $7.
First, there is the technical argument. At the time of this writing, Sprint stock traded at $4.97, exactly a dime above Sprint’s 50-day moving average, which potentially indicates that valuations are in the early stages of a recovery.
Further adding weight to this assertion, the current price action is trending inside a long-established support channel dating back to January 2012.
The rebound of Sprint’s share price from its December 2014 bottom — when it briefly dipped below $4 — has given the stock a three-month average performance of 4.6%. Of quarterly averages that have come in 20x above and below the current average, 75% of market moves over the next three months have been bullish, typically resulting in returns of 12%.
Even better from a risk management perspective, of the 25% of the time when the market turns bearish, the average loss is less than 5%. Simply put, the magnitude of the reward and the probability of its occurrence is significantly higher than its equivalent risk components.
The fundamentals for Sprint stock may not be too terribly exciting — reading through depreciation and amortization implications is about as much fun as waterboarding — but the real story is in the budding investor outlook.
Look for shares of Sprint stock to exceed the current 200-day moving average, sitting at $5.68, by mid-summer.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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