Hot Stocks for a Cool Market: Radio Shack

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Radio ShackSummer's heating up, but apparently the stock market didn't get that memo. Still, there are plenty of places for burned investors to find respite. In this series, we highlight companies we think will warm up your portfolio's returns.

Investors tend to get excited when a stock gains entry into the S&P 500. Beyond any short-term boost provided by index funds and exchange-traded funds scooping up the stock, it signifies entrance into the big leagues.

For Radio Shack (RSH), the opposite occurred on June 30.

But the average investor is probably more shocked that Radio Shack was in the S&P 500 to begin with.

Who can blame the doubters? If you mention Radio Shack at a party (a sure way to get a party started), you'll undoubtedly get a response that goes something like this: "What, did your ham radio club go there to get RF converters for your Atari?"

I get it. From an investing angle, the jokesters have a legitimate point: If you look at its sales figures, you'll see that Radio Shack has lower sales today than it had in 1994! And if you look at its stock price you'll see that it's near 52-week lows.

So why do I see an investment opportunity where others see a punch line?

Bringing the heat

Think of Best Buy (BBY) as a supermarket. That makes Radio Shack a 7-Eleven. Sometimes you just need a carton of milk and some beef jerky. Do you want to park a half a block away and wind through endless aisles of merchandise? Or would you rather stop somewhere where you can just dash in to pick up a few essentials?

That's what Radio Shack has -- all the essentials, just not the selection. Throw in a relatively knowledgeable sales force, and the convenience factor is pretty strong.

The company has embarked on a rebranding campaign (it's now "The Shack") to get customers to make a gadget pit stop more often. They get a few points for realizing a 19th-century technology in the name isn't ideal.

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More important than the name change is the makeover you'll notice in its stores the next time you walk in. Front and center are its mobile devices, including cellphones from multiple carriers including AT&T (T), Sprint Nextel (S), and T-Mobile. You'll see Apple's (AAPL) iPhone and iPad on its shelves. It's putting its winning category front and center: As a whole, The Shack's mobility unit now makes up around half of sales. That's a far cry from Atari RF converters.

In addition to its own stores, it's been rolling out mobile kiosks at Target (TGT). It was up to 887 at the end of the first quarter and expects to report a total of 1,450 in the just-ended quarter.

The Bottom Line on The Shack

Showing signs of life operationally is great. But name changes and makeovers don't mean a thing if they don't translate into profits.

Guess what, naysayers? Surprise, surprise, The Shack delivers. It currently sports a 19.2% return on equity, and it's been profitable every year since 1997.

Even better, the price on Radio Shack is quite low. For a good balance sheet, a business that's better than most folks think, and a smart shift in focus toward mobile products, we're paying just 7.9 times trailing earnings and getting a 1.8% dividend yield.

Now, I'm not going to sugarcoat it. Competing against the likes of Best Buy, Walmart (WMT), and Amazon.com (AMZN) isn't ideal. But with a price that low, the market isn't expecting much from Radio Shack. Combine those low expectations with its underrated past performance and current plans, and I think this company is set to surprise.

I've bought shares of Radio Shack in my public-facing real-money portfolio and think it could be just the kind of stock that can make your summer a little sunnier. Just don't expect it to win you friends at your next pool party.

Anand Chokkaveluis a Motley Fool analyst. He owns shares of Radio Shack, Best Buy and Apple. The Motley Fool owns shares of RadioShack, Apple, Walmart, and Best Buy.



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