The house rules are simple in this weekly column.
I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, RadioShack (NYSE: RSH ) .
This is no love shack
It's been 18 months since I panned RadioShack in this column. The small-box retailer of consumer electronics was hitting fresh lows after its kiosks were being booted out of Wal-Mart's (NYSE: WMT ) Sam's Club.
Some investors will argue that it's dangerous to bet against companies trading at new lows, but the stock's close at $16 seemed like just the beginning of the end for the company.
I was right. Today's open -- $2.79 -- represents an 83% plunge since last year's diss.
The latest step down in this ugly story came earlier today after the struggling retailer posted disappointing quarterly results. RadioShack posted a loss that took analysts by surprise, but it wasn't really a shock to those who have been tracking the chain's demise.
RadioShack's decision to move away from traditional consumer electronics and emphasize mobile products and services may have seemed like a great idea on paper, but dealing with stingy wireless carriers and the reduced frequency of return visits has been brutal.
Margins have been crushed. Sales may have clocked in essentially flat -- and that too was below what Wall Street was targeting -- but it just can't turn a profit on today's sales the way that it used to.
Owning RadioShack over the past couple of years should have preconditioned investors into expecting these quarterly disappointments, but at least they could count on the beefy dividend. Well, that huge 13.6% yield that got fatter as the stock got thinner is toast. RadioShack is suspending its dividend, and that's an alarming sign to more than just naive income chasers.
RadioShack is desperate. It's in a cash preservation mode. It has posted back-to-back quarterly deficits, and there's little reason to expect that to change. This is a downward spiral, and the chances of RadioShack being around in three to five years are starting to fade.
There may be a model that works for RadioShack, but until it figures that out, the clock is ticking down. You don't want to be here when it hits zero.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
- Apple (Nasdaq: AAPL ) : Yes, the world's most valuable tech company is also taking a hit today. The company didn't sell as many iPhones as the market was expecting in its latest quarter, but Apple is pretty much the anti-RadioShack. It's starting to pay a dividend. It's the one making so much money on its proprietary smartphone that carriers and retailers are taking the brunt of the subsidized handset sales.
- Target (NYSE: TGT ) : When Sam's Club shut the door on RadioShack last year, Target stepped up to save the day. The cheap-chic department store chain struck a deal for RadioShack kiosks in hundreds of its stores, but it's better to own the landlord than the tenant in this case. Target has been a resilient retailer. Unlike its rival discount department stores, Target has managed to cultivate a thrifty culture that's still fashionably acceptable with young shoppers. Target has sidestepped the showrooming craze that has hurt others by striking deals with iconic designers and celebrities for exclusive merchandise. Like Apple, Target's fetching an earnings multiple in the pre-teens based on next fiscal year's profit estimates. Good luck trying to peg a multiple on RadioShack now that it's losing money.
- Qualcomm (Nasdaq: QCOM ) : Smartphones may be the future, but it's hard to get excited about the retailers sacrificing margins to sell them. Even the handset makers -- outside of Apple -- have struggled to stand out profitably. Qualcomm is a thinking investor's play here. The patent-rich provider of wireless technology and services is making serious money in mobile. Qualcomm is also growing at a faster clip than its forward earnings multiple suggests.
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