Tag Archives: fundamentals

Why value investors should appreciate technicals

17 Apr

Value investing is all about searching for financial securities that are at a discount to their core intrinsic value. They also offer a considerable amount of margin of safety to offset any potential downside. We can extend these concepts further but these are some of the primary features. In order to understand stock movements we need to appreciate market composition, cycles within the economy, macro and micro economic issues, fundamental company-specifics and drivers, including near-term catalysts, and general trading behaviour.  As a value investor I don’t pay much attention to short-term technical behaviour such as moving averages, MACD’s, volume and RSI’s. However, it has been estimated that 60% of trading volume is directly attributed to either short-term traders or high frequency algorithms. Therefore, because this group correlates so highly to market performance we need to consider their behaviour and influence.

Short-term technicals overall can generally be viewed as noise rather than having any meaningful value for long-term value investors. The short-term technicals were horrible in March 2009 yet we experienced a generational rally across all stock averages. In terms of technicals I find long term support and resistance indicators as a good barometer for financial instruments. We need to appreciate that there is an underlying fundamental attribute that stock resistance and support levels reflect in terms of market valuation and whether the market is comfortable with that. As always, however, markets are generally inefficient and the market does not always know how to price valuation – the 2000 tech. bubble and the generational March 2009 low highlight this.

To reinforce the point, long-term market behaviour and its directional emphasis is useful and can give clues to future performance. However, viewing technicals in isolation, especially short-term, can be dangerous and is more about speculation and greed rather than investing. It is this type of behaviour and absolute reliance on short-term market performance that almost guarantees continued market volatility and dysfunctional dynamics.

Radioshack (RSH) value trap or value play?

13 Mar

Radioshack has fallen almost 20% YTD 2011. Most of that relates to the downward Q4 revision 2010 and the upcoming retirement of their CEO and Chairman. Additionally there are concerns re: increasing competition from Amazon and Best Buy and issues around margin compression basically from introducing new products offerings like the T-Mobile wireless services and outreach kiosks in Target stores. Lower earnings than the Street expected have also heightened pressure on RSH stock.

Not too long ago hype around TPG/Blackstone offers circa $3bn propelled the stock upwards and provided a comfortable level of support. Basically this stock offers deep value at around 5x P/E backing out cash – back of the envelope analysis. Long term the fundamentals don’t look good for the brick-and-mortar side of the business but in the medium term until franchises like Amazon offer reliable post-service purchase support for electronic products consumers will still prefer to purchase the higher priced electronics and white goods direct from the retailer. This type of mindset may take a decade to reverse because quite clearly pure play online retailers don’t offer the post-purchase support or the direct interface with the product like a traditional brick-and-mortar. Visibility and the aesthetics of the product itself are critical here. Amazon have introduced more video displays of products but mainly reserved within electronics to the more portable products, which are more conducive to online purchasing.

Radioshack is very attractive right now without considering any takeover premium. RSH still also has an accelerated $500m share repurchase program outstanding. Their clear appreciation of the mobile euphoria  and their positioning to capitalise on that shows that RSH management are credible and prior succession planning should ease the concerns on the Street.

The last 2 years have also shown us that even in difficult economic circumstances consumer electronics esp. mobile products have remained strong and are experiencing double digit annualised growth; Radioshack online offerings can also boost marketability and help towards alleviating margin compression.   Our fickle nature as humans require that we have products (that we deem to have a need for) immediately; online purchases delay the consumer and the ability to cross-sell is markedly reduced compared to brick-and-mortar. Taking a quick look at Youtube and forums consumers point out that RSH staff lack product knowledge and that some stores are frequently empty; private equity would root out any locational inefficiencies and would focus on upskilling existing staff. RSH needs to address these issues ASAP especially at single-fronted stores away from the main malls. At the same time Best Buy’s adventure offshore widening its market exposure may benefit Radioshack (RSH) in that this may provide opportunities to capitalise on any domestic weakness BBY may exhibit.

Radioshack does need to normalise in this new environment and assess its store positioning and geography and assess the feasibility of its current locations. Obviously margins need to be improved so cost reductions and efficiencies are going to be ongoing issues for the next couple of quarters and over the next few years. Some of the dynamics at Best Buy and Radioshack are reminiscent of Blockbuster – falling margins, online competition, more demanding consumers, price inelasticity, and industry consolidation. However, the key difference is that Netflix created an altogether new platform and commoditised the process; the process of renting DVDs became a homogenous process; Radioshack is a multi-product offering so the risk is somewhat spread and less concentrated.

Radioshack though is not a long-term hold, I expect an upward correction to fair value and it is difficult to estimate the px quite frankly but is markedly above current levels. I would not be at least surprised if Best Buy (BBY) sought to purchase RSH to anchor its domestic foothold on the consumer electronics market in order to rationalise and focus on its global footprint with its full attention. Seagate recently purchased Hitachi’s hard drive business further consolidating that market and the px of the remaining players in that niche rose because competition is now reduced offering the remaining players more flexibility and control on pricing and margins.

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