Circuit City's Shares: No Different Than a Lottery Ticket

| About: Circuit City (CCTYQ)

Circuit City (NYSE:CC) CEO Philip J Schoonover has finally resigned. Here is a guy who took a reasonably profitable company, a company that Jim Collins described as great in his book 'Good to Great' and ran it to the ground. Under his stewardship, CC's share price plunged from $30 to $1.7.

While all this was happening, the CEO had no idea why, or what could be done to turn the company around. He tried desperately, like a guy who is drowning and doesn't know how to swim. For example, replacing senior employees with high school kids to cut costs was a particularly dark chapter in the history of Circuit City.

If a company's return on assets is less than the cost of capital, it is not wise to buy more assets. Despite that, CC kept on opening more and more stores, leading to bigger losses. One may argue that in retail, the economy of scale matters a lot, but you have to have some idea as to what revenue target you will need to break even. It seems that the more stores Circuit City opened, the more losses it reported.

The chances of Circuit City's survival as an independent company are now slim. Either it will be bought out by vulture investors (which seems more unlikely now since all the company's cash was squandered by the current management), or it will be bought by some other company that sees synergy with CC. The best scenario for investors is that the new CEO will turn the company profitable, or at least break even, making it considerably more attractive to prospective buyers. This process will take a long time. If you are patient and adventurous, you can either earn a 400% return in 1-2 years, or lose it all.

Disclosure: None