Is RadioShack Really Coming Back?
Just as RadioShack Corporation (NYSE: RSH) was on the road to zero, Standard General arrived as the white night and announced that it may explore rescue funding for the beleaguered retailer.
Standard General's Large Stake
Of course, the announcement took place after the hedge fund accumulated a large stake in the company of 7.1 percent, or 7.13 million shares, as of June 30. Most likely, the fund acquired many of the shares as the issue declined from $2 to less than a buck. Also, they may been active in this in July and August, as the issue swooned to an all-time low of $0.55.
RadioShack, which reached an all-time high of in December 1999 of $79.50, has been in steady downtrend ever since. Although there have been relief rallies in the issue, investors have taken the stance that the company will suffer a similar fate to other brick and mortar electronic retailers such Comp USA and Circuit City.
Super Bowl Commercial Boost Shares
Besides the supposed rescue plan by Standard General, the last bit of good news from the company was its commercial that aired during this year's Super Bowl. The ad, titled “The 80s Called: They Want Their Stores Back,” mocked its own brand with past celebrities Hulk Hogan, Mary Lou Retton and Alf stealing the store's outdated merchandise.
It was the company's attempt to get people to rethink the RadioShack brand. The company's CMO Jennifer Warrren said in a statement, “This ad is meant to grab attention, make viewers laugh, and let people know: it's out with old and in with new RadioShack.”
No Effect On EPS, But On Share Price
It is hard to argue that ad did anything to bolster the company's sales. In its most recent earning report, the company missed Wall Street estimates by a wide margin for EPS ($.98 versus $0.52 estimate) as well as missing on the revenue front with $736.7 million, instead of the 767.45 million estimate. This marks the eighth consecutive quarter of earnings miscues. What is more alarming is that the percentage miss on three of these occasions was more than 800 percent.
Apparently, the only thing the commercials accomplished was to provide a temporary boost to the share price, as RadioShack rose from its pre-commercial price of $2.40 to as high as $2.79 later in the month. After reaching that price again on March 3, its March 4 whopping $1.15 EPS miss ($1.29 versus $0.14 estimates) reinvigorated the move to the downside, shedding $0.47 on the session from $2.72 to $2.25.
After hanging out at that level for a few weeks, the the issue fell under $2 mid-April. The slide continued, and on June 20, it settled under the important psychological support level of $1 at $0.92.
The Fate Of Most Issues That Fall Under $1
As many investors can attest to, a vast majority of stocks that slip under $1 eventually end up going to zero. If not for the supposed rescue plan, RadioShack was almost halfway there when it reached $0.55 and settled at the same price on August 4.
For the remainder of the month, RadioShack crept back up $1, likely buoyed by the large stake Standard General was in the process of accumulating. Then, in Icahn-Ackman like fashion, it was revealed by Bloomberg that Standard General was mulling whether to put together a so-called rescue fund to bail out the troubled retailer from a likely bankruptcy.
Af first, the Street was slow to react to the news, not understanding why any investor would put cash to work in a company that was destined to fail. As the momentum crowd got the word, they punished the shorts in the issue rallying it from its August 26 close of $0.86 to $1.77 in next three trading sessions and retreated to settle at its highest price since April 16 at $1.69.
Hype Fades After Momentum Players Exit The Issue
Since closing at that artificially high level, it retreated to $1.03 only two days later and is attempting to post its seventh consecutive close at more than $1 since mid-June. It would be interesting to know whether Standard General parted with its any of its stake during the rapid ascent to $1.77.
Risk-Reward At Current Level
For investors who want to bank on the plan the coming to fruition, the good news is that they can purchase the shares around $1.20 and have a free look at the upside. The bad news is if the company fails to deliver a rescue in short order, the share price is likely drift back under $1 and eventually to zero, where the company would enter bankruptcy proceedings.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.