I've heard an oft-repeated sentiment from colleagues throughout
my two decade investment career: "If it's not timely, it's not
worth my time." I love that. While many of these folks are buying
and selling stocks they think will make an imminent move, they are
ignoring the vast universe of stocks that lack short-term
catalysts. For those with an investment view that extends beyond a
quarter or two, some sectors are practically begging to be noticed.
Case in point: consumer electronics retailers. These stocks are
cheap, unloved and poised for better days ahead.
Perhaps the sector is already springing to life. Just three weeks
a Texas-based regional consumer electronics chain. The stock has
made a 50% move in that short period, and I think more gains lie
ahead. In fact, the stock would need to rise another 40% just to
account for the value of its
. Recently trading at $8.70, the stock would need to trade up to
nearly $16, just to reach tangible
Conn's may be a "book value" play, but the whole group can also be
seen as a cheap
play. They're also awfully cheap on an enterprise-value-to-sales
How cheap? Excluding Conn's, the other three retailers on this
table trade for just 3 to 4.3 times trailing
(earnings before interest, taxes,
). The EV/sales ratios of 30% or lower are also extremely low.
These kinds of multiples would seem to highlight real distress for
these retailers, but that's simply not the case. Instead, as I
noted earlier, these stocks are simply not timely. Some investors
will suggest they are out of favor because of
push into consumer electronics. Have you actually tried to buy any
electronics at Walmart? Good luck finding a sales person with any
clue about what they're selling. (Apologies to the few Walmart
sales people that actually have knowledge -- no slight intended to
you.) Indeed, the main reason stores like
Best Buy (NYSE:
exist is because they have very knowledgeable sales people that can
answer any question, and most importantly, know how to close a
So the Walmart explanation isn't the real culprit here. Instead,
it's a combination of high unemployment and a lack of buzz-worthy
products (outside of the iPad). Yet that is precisely the time you
want to own stocks like this: when investors can see little reason
for near-term cheer. These stocks (with the exception of Conn's)
trade right near their 52-week lows.
Even as these firms muddle through a tough year, they remain quite
profitable: RadioShack has generated an average of $155 million in
free cash flow
in each of the last four years. This figure stands at $700 million
each year for Best Buy. What to do with that money? Each company is
in the midst of share buyback programs, figuring that per share
profits can be spiked nicely higher as the share count shrinks.
Both Conn's and hhgregg prefer to deploy their cash back into the
business, opening new stores at a rapid clip.
Searching for catalysts
So what will it take to get these stocks moving? One of two things:
Either employment trends need to improve or consumer electronics
manufacturers need to create buzz-worthy new products. When
employment trends strengthen is an open question. It took awhile in
the early part of the last decade as we were coming out of
, but employment eventually took off by 2003 and 2004. A similar
pattern may play out this decade.
But these firms are hardly sitting on their hands, waiting for an
economic upturn. Instead, they are trying a raft of new initiatives
to drive store traffic. For example, Best Buy is gearing up to make
a major push into electric car chargers. The company's "Geek Squad"
will be able to install 220-volt charging systems at a consumer's
home. In the next year,
, Mitsubishi, Fisker Automotive and others will be rolling out
RadioShack, which recently installed new leadership, is also
looking to spruce up its product offerings. ["
4 Stocks Set for a Second Half Comeback in 2011
"] It recently began selling the iPad (though not soon enough to
save what is expected to be a lackluster quarter according to
analysts), and you can look for more tablet computers to be stocked
as Acer, Samsung,
and others roll out models. (It's not clear which firms will work
with RadioShack, though the retailer is said to be having
discussions with a range of them).
The point here is not that electric vehicles or tablet computers
will save the day by themselves. But they highlight the unique role
these niche retailers with highly-trained staffs can play as
consumer electronic choices become ever-more complex.
Action to Take -->
The starkly cheap valuations noted earlier raise another possible
catalyst: interest from the Private Equity crowd. These firms love
business models with high
and low debt
. Regardless of the
, these stocks are undeniably cheap simply because they aren't
"timely," which is exactly why you should think about accumulating
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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