Never give up.
This is a phrase that is uttered nearly ubiquitously in the American cultural landscape, a verbal symbol of the nation’s unique rise to prominence through perseverance, fortitude, and good ‘ol fashioned moxy. While the sentiment is noble and carries significant moral weight, such philosophical commitments often get in the way of sound financial judgment. After all, finance is about the logical application of empirical facts: there is no room nor need for emotions. And when a company’s market share has been decidedly decimated, as has been the case for RadioShack (NYSE : RSH), there is often little choice for investors but to cut their losses and run.
The Specialty Electronics Retailer
The specialty electronics retailer, long the go-to establishment for hobbyists and do-it-yourselfers, recently reported dismal earnings for the third quarter, with sales tumbling nearly 16-percent from a year prior, while same store sales declined 13.4-percent. The categorically excruciating losses absorbed throughout this year has led to a larger than expected net loss of $161 million, fueling the forest fire of speculation that the company is headed towards bankruptcy.
It’s easy to see why investors have lost virtually all faith in RadioShack. One of the few Big Board traded names with liabilities totaling more than assets, the retailer has nothing to offer the fundamental investor. The one bright spot, the nominally high annual revenue in excess of $3 billion, is mired in a gross profit margin that consistently shrinks year over year. On a quarterly basis, a small improvement in the profit margin is nowhere near adequate to reverse RadioShack’s declining market share, let alone to mitigate it.
Technically, a more severe argument could be made, especially after equity valuations were swept underneath a torrent of volatility that occurred at the beginning of this month. Using the Elliot Wave Principle of chart-reading and interpretation, the market session of December 1st was a pivot point, where the price action prior to this position was charting a series of higher lows. At the pivot, the market had an opportunity to decisively sustain the positive momentum or to change course. Unfortunately for the RadioShack loyalists (the tens that remain), the market chose the latter.
Further pain was leveled on investors when the price fell below a critical support line at 55-cents, breaking what little cohesive pattern was evident in the charts. With so many critical flaws in the financial statements, the risk to go long RadioShack is exceptionally high, even with traditional technical indicators suggesting an over-sold condition.
Opportunity for Short-Traders
Despite the fact that company shares have been ridden down by the bears for a prolonged period of time, there is still an opportunity for short-traders to extract a healthy profit. Part of this reasoning is fundamental. If a company has no valid basis for rising in value, it will likely continue falling in value even though it has taken a multi-year beating. However, the biggest appeal to the shorts is the blood on the streets. Competitively, consumers would likely not miss RadioShack if it were to go bankrupt, making efforts towards a recovery fruitless and foolhardy. Understanding this context, professional short speculators may be lining up their sights for one last (and fatal) strike.