RadioShack Stock: 3 Strikes & You’re Out?

Submitted by George Putnam, III as part of our contributors program.

RadioShack Stock: 3 Strikes & You’re Out?

After RadioShack (RSH) filed for bankruptcy on February 5th, the stock dropped to just a few cents per share. Many investors who sometimes dabble in penny stocks are probably wondering whether there will ultimately be any value in the RadioShack stock, which now trades in the OTC Markets with the symbol RSHC. I think that it is highly likely that the stock will ultimately be worthless, despite the company’s well-known brand. The RadioShack stock has at least three things going against it.

First of all, the stocks of companies that file for Chapter 11 almost never do well. Under the bankruptcy laws, stockholders come at the bottom of the list of a company’s creditors, and all of the other creditors must be paid off in full before stockholders receive anything. Since a company is usually in pretty serious trouble when it files for bankruptcy, it is very, very unusual for it to have enough value to satisfy all the creditors and have something left over for shareholders.

As if that wasn’t bad enough, it is my observation retailers tend to fare even worse in Chapter 11 than companies in many other industries. In a retail situation, the list of creditors that come ahead of the shareholders can be especially long because it will include all of the vendors who have shipped goods to the stores as well as the landlords of all of the store locations.

Finally, it is my sense that electronics retailers tend to fare especially badly in Chapter 11, even among retailers. Maybe this is because of is the rapid obsolescence of their inventory or the customers’ concerns about post-sale advice and service. At any rate, over the years we’ve seen a large number of electronics retailers with well-known brands, ranging from Crazy Eddie in the 1980s to Circuit City a few years ago, disappear with nary a trace.

RadioShack also has some bonds that are currently trading for about 15 cents on the dollar, but I would be wary of those as well. There are a large number of creditors who come ahead of the bondholders, and I doubt that there will ultimately be enough value in the franchise to provide much, if any, recovery for the bonds.