RadioShack: When News Is An Excuse

Jun. 7.12 | About: RadioShack Corporation (RSH)

We all have biases. Some of us manage them more transparently than others. Often, we will latch onto a development and give it more significance than appropriate, simply because it confirms a latent bias. In this case, news is not a reason to sell a stock, it is an excuse.

RadioShack (NYSE:RSH)

If you're bearish on RadioShack, it is probably because the the company is a retail middleman, and you think it's getting cut out of the transaction chain. Amazon (NASDAQ:AMZN), for example, offers a cheaper way to purchase an item with a wider selection and more honest reviews. Apple (NASDAQ:AAPL) commands a dominant portion of profits in the device space, and does so with relatively small reliance on partners like RadioShack. And Google (NASDAQ:GOOG) has recently announced plans to sell an Android tablet directly to consumers.

One might take these as signals to show that consumers are getting smarter on price. This would be a problem for RadioShack, whose demographic is: people willing to pay a bit extra. But one must take this news in context. The case against middlemen is not a new idea. There is a reason RadioShack has survived thus far, as a middleman. And it's not as simple as projecting the death of the brick-mortar based on the idea that people, in 2012, are still learning how to buy things on Amazon.

Some people don't want to bother comparing prices. Others appreciate the level of attention they get at RadioShack. Still others find the location convenient and/or conducive to impulse. Also, many of us prefer to get advice from a live person before buying technology. Still others simply shop there out of habit. If one tries hard enough, one can typically find a deal elsewhere on a product that beats RadioShack's price. But you know what? This was the case well before the earnings problems over the last couple years.

Would I "bet the farm" on RadioShack? No. But don't use this ephemeral iPhone margin pressure to confirm a perennial bias against middlemen. The P/E is obviously not a basement bargain, but there is room for a rebound in earnings. RadioShack is a compelling value investment that can easily double its share price in a couple of years. I hope you have more reason than middleman bias for asserting that it is a value trap.

Shares have set a low. Beware the mantra "this time it's different".

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.