While a large number of penny stock traders have made fortunes over the years scouring the Over The Counter Market ("OTC") in search of hidden gems, delisted big board tickers and those who file bankruptcy have long been plays that have scored big gains for them. Just looking back three years ago to 2012, any trader with enough guts could have scored shares of Federal National Mortgage Association (OTCQB:FNMA), Fannie Mae, or Federal Home Loan Mortgage Corporation (OTCQB:FMCC), Freddie Mac, for well under $0.20 while on the OTC, both of which soared to $6.00 or better and still trade well above the $2 range today. The latest entrant into the "cash grab for gains" on the exchange is RadioShack Corp. (OTCPK:RSHCQ) which, after some exceptionally good news last week regarding their Chapter 11 bankruptcy proceedings, could have it positioned to be "The Swing Trade" ticker of the year.
RadioShack filed for voluntary bankruptcy protection on February 5, 2015 under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. By filing Chapter 11 rather than Chapter 7, the Company is continuing in possession of their properties and are managing their businesses, as debtors in possession. The writing appeared to be on the wall last year when, on July 24, 2014, they were notified by the NYSE that the average closing price of our common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price for continued listing on the NYSE under Rule 802.01C of the NYSE Listed Company Manual. Temporarily saved by the skin of their teeth on the last trading day of the month and quarter, RSHC closed at $0.92 and had an average closing price for 30 consecutive trading days of $0.92 which gained the Company approval from the NYSE for an extension for compliance until their annual meeting scheduled for June 2, 2015.
Now on the OTC and thrown under the bus by those who look down at traders who make their money from momentum swings on penny stocks, few will admit that the same sentiment was thrown around three years ago when American Airlines, AMR Corp. (NYSE:AMR), did the same as what RadioShack has done. While AMR traded as AAMRQ on the OTC, one could have gotten in the stock for well under $0.40 for nearly a year. When they're merger with US Airways Group (NYSE: LCC) in 2013, shareholders of AAMRQ received in total 0.744 shares of AAL for every share of AAMRQ they held. In real terms for those who speculated and held those under $0.40 AAMRQ shares:
- $1,000 @ $0.40 = 2,500 shares of AAMRQ
- 2,500 X 0.744 = 1,860 AAL shares
- 1,860 AAL shares = $91,456 as of April 2, 2015
When dealing with publicly traded companies that have filed Chapter 11, one must consider a phrase similar to what was told to Peter Parker, "with great reward comes great risk." A lot of companies that exit Chapter 11 disregard the unsecured shareholders of the "old" company, the common stock shareholders, and formulate a new capital/share structure for the new entity. Chapter 11 bankruptcies are different from Chapter 7 in the sense that there is a glimmer of hope still left. Chapter 7 is typically a fire sale of all assets to make the best effort attempt to make good on all or some portion of debts. Conversely, Chapter 11 is a very intricate process which buys some time for the Company involved so that they may rearrange their debt, restructure it, and try and resurrect from the proceedings as a "new" company.
A number of publicly traded companies have survived Chapter 11 proceedings and come out to be even bigger big board players like American Airlines did by merging with US Air. Some well known names that have survived in recent years include: Macy's (NYSE:M), General Motors (NYSE:GM), and Delta Air Lines (NYSE:DAL).
RSHCQ YTD Chart:
RSHCQ showed massive signs of life last week after the Company got the best news they could have hoped for right in the nick of time before all-out liquidation. On April Fool's Day, April 1, of all days, RadioShack announced they won court approval for Standard General's rescue deal that will permit the Company to save 1,743 stores and 7,500 jobs. This immediately resurrected RSHCQ shares and provided a "lifeline" of sorts for momentum traders to begin to swing for gains. Despite objections from competing lender Salus Capital Partners, Judge Brendan Shannon said Standard General offered more money (about $160 million) and was the only bidder with the "added and terribly important benefit of saving more than 7,000 jobs and preserving a century-old American retailing icon."
Typically around 2,000 square feet, RadioShack had 4,297 locations that was going to be forced to make decisions about going forward through its restructuring. Of the 1,700-plus locations that will remain from more than 4,000, most of which is retail space in areas with high foot traffic, as well as malls and other desirable locations, Sprint (NYE:SS) will share more than 1,400, taking up about a third of the store, dominating the space via their Sprint logo and staffing the locations with their own employees.
The Company currently expects that all of its stores that have not been acquired by General Wireless in the Sale and that will not be acquired by Office Depot Mexico in the Mexico Sale will be closed by April 30, 2015.
While some speculate that RSHCQ could eventually end up completely worthless, it's worth noting that, on March 30, 2015, the Debtors filed their monthly operating report for the period of February 6, 2015 through February 28, 2015 with the Bankruptcy Court. The results showed:
- Net sales and operating revenues: $134.2 million
- Cost of products sold (includes depreciation amounts of $0.5 million): $100.3 million
- Gross profit: $33.9 million
- Total current assets: $616.8 million
After almost 100 years in business, the retailer had a better than average run and could probably benefit most by reinventing themselves as an online only entity, freeing up cash from its stores, lowering overhead, and adapting the more popular online model that is slowly taking over retail as we used to know it. As part of the winning bid by Salus, they have first claim on RadioShack's IP, including trademark, patents and customer lists. If Salus dumps this, their worst case scenario of RSHCQ being worthless could be realized since the sale would more than likely leave little, if anything, for any unsecured creditors.
Seeing as how RSCHQ reacted on Thursday, trading between $0.1970 - $0.34 with dollar volume of $ 3,241,149, big money swing trades are likely to be placed as the month of April proceeds. With FNMA having long been one of the top traded penny stocks on the OTC for the past two years, expect to see RSHCQ up there as well with many hoping for a fraction of the result that AAMRQ provided (especially since there are just over 100 million shares issued and outstanding as of November 30, 2014).
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in RSHCQ over the next 72 hours.