Shares of RadioShack (RSH) soared 19.4% to 87 cents on more than three times the average trading volume, following news Tuesday that one of RadioShack’s largest stockholders, Standard General LP, is in the process of making a deal with the beleaguered specialty retailer in an effort to rescue it from bankruptcy, according to Bloomberg News.
Standard General, the little-known hedge fund that injected $25 millions earlier this year to rescue another retailer, American Apparel, seeks to refinance RadioShack’s $250 million term loan to avoid a Chapter 11 filing, Bloomberg reported.
After nine straight quarterly losses, RadioShack’s dwindling cash will last only another few quarters, which analysts suggest is the best-case scenario without a major restructuring plan to stem the two-year-long hemorrhage.
Under a worst-case scenario – possibly coming from a sudden halt of merchandise deliveries by a major supplier – RadioShack would most likely need to immediately file for bankruptcy protection, as other suppliers would quickly move to stem further losses from credit extended to the retailer.
“If no one else takes any kind of action, this is going to zero,” Anthony Chukumba of BB&T Capital Markets, told Bloomberg. “Even if they are able to get this rescue financing and close a bunch of stores, it still is going to be an uphill climb.”
With more than a 7% stake in RadioShack already, it appears Standard General may be about to double down on its bet with a rescue plan as RSH sinks below the dangerous level of $1 per share.
The ‘News Release Ambush’
In June, Jason Bond tipped off readers of the high likelihood of a ‘News Release Ambush’ and a resulting short squeeze as the stock traded near the one-dollar mark.
Stocks which trade below $1 for 30 consecutive trading days receive a delisting warning notice from the New York Stock Exchange under NYSE Rule 804.00. After a company becomes delisted from a major exchange, raising capital becomes markedly more difficult.
Therefore, to avoid this unpleasant situation, management must make major moves to immediately regain investor confidence in the company.
And when a stock begins trading below $1 for a few days, or a couple of weeks, an important and meaningful news release is usually issued by the company as a last-ditch effort to bring buyers back to the shares.
At Jason Bond Picks, we call these announcements, ‘news release ambushes’, because a stock in trouble attracts a legion of traders on the short side – a bet on a stock’s decline – of the trade. And after nine consecutive quarterly losses, RSH’s short position as a percent of total outstanding shares has risen substantially throughout the two-plus years of the company’s cash drain.
“The short interest in RSH is estimated at 30% of share outstanding,” Jason Bond of Jason Bond Picks stated in a June 15 article, titled, RadioShack Poised to Melt Up. “Our thinking on a RSH play is, not that the company may surprise Wall Street and avoid bankruptcy, … our thinking focuses on a potential set-up trade as the stock approaches $1.
“Trades like the one we see coming could yield a 10% or 20% quick profit from a RadioShack ‘news release ambush’.
“[W]e also expect RadioShack to make an announcement to rattle the shorts as the stock drifts lower to that price level, with the intent of punishing traders who weigh on the stock during the last-shot effort to turn the company around,” Bond concluded.
Following the announced negotiations with Standard General, shares of RadioShack rose as high as 17.4 cents, or 24.1%, before settling up 14 cents, or 19.4%.
What Jason Bond Expects Now
If history is a good enough guide, companies that must turn to hedge funds, private equity firms or aggressive financiers, most often gain a second wind and renewed optimism from speculators.
Sirius XM Radio (SIRI), as an example of another Jason Bond Picks stock, traded as low as a nickel during the first quarter of 2009 before trading as high as $4.00-plus during the fourth quarter of 2013.
In the case of SIRI, the stock has since rebounded 80-fold from those dog days of Feb. 2009.
And an example more germane to RadioShack’s situation and players, consider Standard General’s $25 million stake in American Apparel (APP) and the subsequent loan of $19.6 million made to American Apparel CEO Dov Charney for the purposes of buying back Standard General’s stake of 27.6 million shares of APP, in June.
News of the bailout took APP from a low of 51 cents in the week ending Jun. 23, to as high as $1.30 in the week ending Jul. 14., or a potential 154% return (two-bagger-plus) within three weeks to investors bold enough to catch the trade.
“Could we get another APP-like move out of RSH?” Bond asked rhetorically. “Of course, but we expect a two-bagger might be a minimum move for RSH. We’ll have to see the details of the deal, first. I believe the shorts will be ambushed.”
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