Will RadioShack Restructure?

 | Aug 27, 2014 | 4:00 PM EDT
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As a value investor, I am predisposed to have an interest in turmoil and distress. Optimism is expensive in the stock market. Pessimism can be a great opportunity but it can also be a painful investing experience. The market hates uncertainty and can often over discount uncertain outcomes. Yet uncertain outcomes can also lead to complete losses.

RadioShack (RSH), a once iconic retailer, has seen it shares rise almost 100% in the past several weeks on news that a large shareholder is attempting to restructure a deal for the company. RadioShack's second largest shareholder is currently working with other investors to avoid a bankruptcy filing for RadioShack. Not surprisingly, the shares reacted swiftly to news. I have had direct experience working with underperforming businesses and here's the fundamental takeaway as it relates to RadioShack:

RadioShack is not worth the $0.90 that the shares were recently trading for. The equity is either worth nothing or it's a multi-bagger from the current levels. RadioShack has more than 3,000 retail locations and, unlike most retailers, RSH stores are very small --  typically only a couple thousand square feet. When Best Buy (BBY) was in danger of failing, a big focus was on reducing the size of its retail stores. RadioShack doesn't have that issue; the issue is inventory.

In a fantasy scenario, RadioShack would become a retailer of smartphones, tablets, accessories, and other high-demand, high-margin products. Who knows, that may be the plan. The problem, however, is that RadioShack has an old image that needs to be changed before anything can happen. And there may not be enough time for that. For the equity to succeed, the shareholders will have to convince creditors.

The shares have been surging again today. I believe RadioShack is better off outside of bankruptcy and this may be the opportunity of 2014. But right now, the rumor is moving the stock. If a deal is not worked out, it may be the last straw for the company. Even if a deal is brokered, existing shareholders may be quite diluted. For most investors, this ride is perhaps better observed from the sidelines.

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