Radioshack Corp. (RSHCQ) investors were left feeling a little perplexed and excited today as they watched shares climb up as much as 8% on little news from the company. Some of the only news coming out of the beleaguered retailer recently was the recent downgrade of its debt rating by Standard & Poor's to CCC+ last Friday. The debt rating and a possible wildcard could be playing a role in today's movement.
Debt downgrade shines light on expectations
The downgrade by S&P was gloomy at best, and it sited all of the factors negatively affecting the company current shareholders should be familiar with: shrinking margins, higher leverage, fierce competition, recent poorer than expected Q3 performance, and poor management. So gloom and doom aside, there was a glimmer of hope in the report: low expectations. S&P noted, while unlikely, they would consider raising the outlook from negative to stable if the company was able to increase margins by 1% and grow sales in the low to mid single digits. Basically, RadioShack just needs to stop the bleeding, and its debt borrowing cost could be reduced if the ratings agency raised their outlook.
The wild card
The share volume traded today was rather light, so it's hard speculate, but if a guess had to be ventured, short covering could be the culprit here. The latest short interest was at 37% of shares outstanding with days to cover at 12 days. That means at current average volume, it would take 12 consecutive days of buying for short-sellers to cover their current positions. When days to cover get this high, it's common to see large share price spikes as short-sellers take their profits by buying shares back. Which in turn can cause prices to rise by the buying, aka, "short squeeze."
There's also the "hope" RadioShack will be the target of a buyout, but it's doubtful things are that rosy considering the light share trading volume today. So it looks like investors will be left waiting for the light at the end of the tunnel in the interim. Investors should keep an eye out when fourth-quarter earnings are released to see if the company was able to make up lost ground over the holidays, especially from a cash flow standpoint.
