RadioShack Investment Crossroads

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As mentioned in my last RadioShack-related post, I’ve been re-evaluating my position ever since they first announced the refinancing deal last month. And, with 70% of my thesis proven correct, I’ve decided to sell my position for now. Given RadioShack’s current situation, the remaining 30% of my thesis doesn’t offer enough upside at this point in time. Here’s why:

We all know that RadioShack is burning through cash at an expedited pace. Nobody knew exactly how fast, though, until they released their Q2 earnings report a couple weeks ago. In Q2, their cash-on-hand decreased from $61 million to $30.5 million and their credit-line decreased from $362 million to $152 million. If you do the math, you’ll see that they burned through $240.5 million in one quarter, leaving them with only $182.5 million for Q3. That means that Q3 would have to be about 25% better than Q2 in order for the company to stay solvent. With Q2’s burn-rate, though, they’d be lucky to survive through the end of Q3 in September.

To survive solely off of Standard General’s refinancing deal, RadioShack needed to act fast in Q3, finishing the deal and closing 1,100 stores. Fast-forward to September 22, eight days before the end of Q3. RadioShack sends out an SEC filing stating that “The Company and certain of its largest creditors have had discussions with a major vendor concerning potential modifications to the commercial relationship that could be beneficial to a financial restructuring of the Company. These discussions did not result in a change to the commercial relationship at this time but are continuing.”

Emphasizing what I said earlier, RadioShack needed to act fast. If they were acting fast, RadioShack would’ve put out a press release stating that they signed the refinancing deal long ago and already began closing under-performing stores. Instead, they send out an SEC filing announcing that they’re still playing around with other options.

At this point in time, refinancing is no longer enough. Refinancing only gives them the ability to cut costs through store closures, but it doesn’t give them any new cash. And they absolutely need cash NOW. With their low credit rating, RadioShack won’t be able to open-up new lines-of-credit without offering something huge in return. All they can offer at this point, though, is equity. And in their desperation for cash, they’re likely going to have to give up a tremendous amount of equity to get that cash.

So just how much equity would they have to give-up at this point? Well, according to their most recent 10-Q financial statement, they’re currently authorized to issue up to 650,000,000 common shares. As of right now, they’re sitting at around 146,000,000 shares on the open market, so that gives them the ability to issue north of 504,000,000 additional shares without asking current shareholders for approval. And then there’s also 1,000,000 preferred shares and 300,000 Series A shares available to issue.

To make a long story short, RadioShack only has two options now: mega-dilution or bankruptcy. With those being the only two viable options (both of which decrease shareholder value), maintaining my RadioShack investment provides no benefits at this time. So I plan to wait on the sidelines for either bankruptcy or an SPO. An SPO would likely provide the open market with largely discounted shares, making the risk-reward potential dramatically better for the thrill-seeking investor. And being that kind of investor, I wouldn’t hesitate buying back in at an SPO price. Because with RadioShack Labs, Fix It Here, and Defense Mobile rolling out, there’s a lot of potential upside if RadioShack has the time to implement Joe Magnacca’s turnaround plan.

Thoughts on Plug Power Form-4 Filings

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Back on June 13, Plug Power chairman George C. McNamee transferred 365,000 of his company shares (nearly 60% of his total ownership) into a trust account that will likely benefit his family years from now. Then on August 26, Air Liquide cashed-in and sold half of their preferred shares, leaving the French gas supplier with just over 50% of their initial position in Plug Power.

With people worrying about the Air Liquide sale, I thought I’d take a minute to look at this through the eyes of a real-world investor:

If you made an investment that saw ten-fold returns, you would likely start looking into ways to maximize your new cash pile. You would re-think your initial investment and weigh your options. You’d take one of three routes regarding that initial investment:

  1. Keep all your shares – You’d likely take this route only if you anticipated probable and extraordinary near-term gains
  2. Sell all your shares – You’d take this route if you lost all faith in the company
  3. Keep some, sell some – You’d take this third route if you had faith in the current company’s long-term future but saw other good investments waiting around the corner

Air Liquide took the third route. A good investor always looks for ways to diversify their cash. It’s both smart and exciting to find other opportunities out there. Yes, Air Liquide has inside knowledge of the company, and yes, this likely means that they don’t anticipate tenfold gains for Plug tomorrow morning. But Air Liquide knows Plug Power is growing exponentially, and they have more than enough shares to benefit handsomely as Plug continues that growth.

As for McNamee, another person with inside knowledge of the company. . . he transferred more than half his shares into a trust account. Maybe he started working on his will, maybe he wants to pay for his grandkids’ college tuition, or maybe he just wanted to avoid taxes. However you look at it, he could have easily sold all those shares. Putting them into a trust account, though, shows that he believes in Plug Power’s long-term viability.

As a long-term Plug Power investor, I realize that I’d be irresponsible to blind myself to other opportunities out there. Like Air Liquide, I will always expand my portfolio as I see fit. That being said, Plug Power still has the potential to be absolutely gigantic someday, so unless my thesis gets proven wrong, I will always keep most of my initial investment in the company.

For all the swing and day traders out there, I have no clue how things will turn out for Plug on a day-to-day basis. For the long-term investors, though, there seems to be a good consensus regarding the benefits of a multi-year (even decade) Plug Power investment.

A Visit to RadioShack’s Boston Concept Store

With 70% of my RadioShack thesis playing out sooner than I expected, it’s already time to seriously re-evaluate my position. So I thought that visiting one of the new concept stores would be a great place to start. Luckily, there’s one that opened-up in downtown Boston a few months ago.

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Sandwiched between a bank and a bakery along the Freedom Trail, the Boston concept store has a considerable amount of foot traffic passing by everyday. Sounds like a prefect location! Unfortunately, due to the the historic status of the area, RadioShack isn’t allowed to do much with the outside of the building. This results in smaller than desired windows and a decreased visual allure. The store doesn’t have much of a chance to actively entice curious pedestrians who weren’t already planning on stopping by. The best this location can do is leave the door open and hope that the music draws people inside. Once you step inside, though, it’s an entirely different experience. (more…)