Insiders Biught RadioShack Corporation (RSH) at Support, But The Stock is Not at Support Anymore

September 25, 2013, 15:20 pm ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

RadioShack Corporation (NYSE:RSH) has been a troubled company in recent years, suffering from lower product demand, online competition, and failed turnaround strategies.  Joe Magnacca, the company’s fourth CEO in the last 3 years, is planning on reducing inventories and securing new liquidity to help turn the company around.  Investors are hoping for a turnaround like rival Best Buy Co., Inc. (NYSE:BBY), but the shares of Radio Shack are already up 84% YTD, and trading near resistance.  Is the stock a buy, sell or hold?

Best Buy proves that a dramatic turnaround is possible, as the stock is up over 220% YTD. Radio Shack has surprised many investors with a healthy return in 2013, however even after a big move in the stock this year, the company’s shares are still down over 58% from Jan 2012 levels.  According to the Stock Traders Daily report, the stock is trading near long-term resistance, as well as the yearly highs in May, so although the initial look may be compelling, there are red flags..

Recent rumors have been suggesting that Radio Shack is looking to raise some cash, as it recently said it would be reducing stocked items at stores from 4000 to 3000, which is a tactic often used by retailers to raise cash. The stock trades around $4.00, but it has $4.33 in cash per share on the balance sheet.  Its debt, however, is a concern, with nearly $7.20 per share in debt.  The new CEO just brought in a new interim CFO and investment banker, in what many are speculating is a move to refinance the company's debt and raise liquidity. Radio Shack leases most of its retail store property, which means the company owns little real estate, and therefore does not offer much security to potential lenders. Rumors have suggested the company is looking to secure a deal as early as October.  The stock has been moving mostly on rumors and speculation about the potential refinancing of debt.  Even if Radio Shack can get a deal done, the company still has to figure out a way to deal with its biggest competitor, Amazon.com, Inc. (NASDAQ:AMZN).

 The growing popularity of online retail has obviously hurt companies like Radio Shack and Staples, Inc. (NASDAQ:SPLS), which makes the recent Amazon lockers deal even more puzzling.  The program allowed Amazon customers to pick up online deliveries from other stores retail locations.  Amazon somehow sold both companies on the concept that Amazon Lockers would actually help drive the two chains’ business.  As Amazon’s customers would entering their stores to pick up their online-purchased merchandise, and because they were in the store, might be tempted to make an impulse buy.  A RadioShack spokesperson recently said the retailer had halted the program because it did not fit with its strategy. 

Competing with Amazon is not the only hurdle RadioShack is facing, as the company needs to find a way to diversify its products.  RadioShack gets around 50% of its revenue from the smartphone market. ComScore believes that 60% of Americans already have a smartphone, and as a result, smartphones are likely to go down in price.  Continuing to focus on low-margin smartphones could put further downward pressure on margins.  RadioShack operating margin went from 7.6% in 2008 to -2.7% over the past 12 months.  Although we have not heard much about diversifying products, the company is working on improving the retail stores themselves.

RadioShack just opened some new concept stores, which are designed to give its stores a fresh look and help reposition its brand.  The company opened its third high-touch store in Long Island on August 3. The stores feature a new speaker wall and other interactive areas designed to help shoppers experience technology first hand.  

Despite all the challenges RadioShack has been facing, the company has seen some insiders who believed the stock was a good buy, as evidence by purchases made in late July and early August.  Eugene Lockhart bought 5,000 shares at $2.67, which was a transaction of $13,347.50. Robert E. Abernathy however, really stuck his neck out and bought 100,000 shares at $2.55, which was a $255,010.60 transaction.

The stock is currently trading around $4 per share, and up of over 50% from where Abernathy bought shares near support.  The stock has made a nice run over the past 6 weeks, but that does not mean the stock will continue to climb from here. If the stock tests resistance, and remains below resistance, as defined in our real time trading report, Stock Traders Daily expects lower levels and a test of support.  That would make RSH a sell/short at resistance, with risk controls in place if resistance breaks higher.

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