Wednesday, June 10, 2009
(Cont'd from above)...

Jim (cont'd):   


Jim:      

We know that one out of every 10 people who were supposed to convert from analog TV to digital hasn't done so yet, and the deadline is at last upon us... this Friday... That's millions of people who won't be able to watch TV... and not being able to watch TV, especially NBC, is considered a violation of the 8th Amendment against cruel and unusual punishment!...

So here's the issue... What do you do when your TV doesn't have a signal?... I'll tell you what you do... You panic!... And, if you're anything like me, the only place you can panic for electronics is Radio Shack!...

Radio Shack... it's a giant panic room... with 4,400 locations to go to whenever you're freaking out about a piece of electronics... Now, if I had time, I probably would not go there. But you cannot go without TV... Radio Shack will be open, so I am predicting mass TV panic... total hysteria... right into Radio Shack...

That's the catalyst for our trade!...

Now, almost every single analyst who follows this company absolutely hates it... You've got one buy, 18 holds, and a sell. They all love BBY, because they regard it as well-run, best of breed... while they've become convinced that Radio Shack will never be able to execute...

Frankly, I don't even disagree... even though the company has had better-than-expected store sales, thanks to, yep... the convertor sales... along with about $873 million in cash on the balance sheet... $7 a share... and this is a stock that's trading at $14 and change.

These guys are serial underperformers, no matter who runs it... But, for a trade, it just might be worth it, because the analysts all have tremendous faith in the American consumer... as pretty much everyone covering the stock assumes that consumers saw the June 12th date (i.e., the deadline when all analog TV signals will stop)... that they saw it coming... and they already spent the whole year tramping to Radio Shack to buy, buy, buy convertors... That's why they predict a huge decline in earnings starting Friday...

I think that's where they're wrong... that's where the trade is...

See, they're not factoring in the next wave of buying... the panic-driven rush to the "Panic Shack"...

I believe the numbers will prove to be too low for the quarter because of the panic. And, when the numbers are too low, stocks go higher. Like it or not, that is exactly what happens...

When the analysts raise numbers, that's the end of the story... that's the end of the trade... because, other than a good relationship with S - which has the totally huge, and totally exciting Palm Pre - which Radio Shack even got a few to sell... and some good business with AT&T Wireless, but not the iPhone... Radio Shack has almost nothing going for it... other than the panic trade... which is why this is a trade, and only a trade, into an upgrade or a numbers bump next week, when people see what happens with the panic...

And that's when you sell, sell, sell...

Because there's no other reason to own this worst-of-breed stock.

But here's the tricky part...

When you buy something for a trade, it's all about price... "Trading" means that you can buy something at $15, and then sell it for $17 a few days later...

If you buy it for $17, and then sell it at $17 or less, then you've ruined the trade... you should never have done it at all.

So let's talk about this as a trade, not an investment... something we only do rarely on Mad Money... despite the fact that I am constantly written off as a trader, if now of course, a buffoon...

What makes a good trade?...

A catalyst... something that's about to happen that can be gamed, and should be positive... and we sure have one with the Friday deadline for conversion.

When you have a catalyst with a solvent firm that's not expensive, that's actually not doing all that horribly away from convertors... that's trading at 10x earnings, with no Circuit City competition anymore... and you can buy the stock at $15, just north of here (i.e., just above where the stock closing price was today), then I think the trade will work and the stock will go higher. And, if I'm wrong, you should be able to sell the stock at roughly the same price you paid for it.

Let's continue the lesson...

In Real Money: Sane Investing In An Insane World... that's the first gospel according to Cramer... I talk about how you can never use market orders to buy stocks, particularly when you're doing a daylight precision trade that I am talking about here. If you use a market order, you will most likely pay $16 and change for Radio Shack.

So here's what you would do if you were working for me at my old hedge fund...

If you could get this stock tomorrow at $15 clean... not a cent more... do it. If you can't get it at that price, take a pass. If people bid this up because of this piece (i.e., this TV segment recommendation by Cramer), take a pass. Those people lose money. It doesn't work for more than a couple of points, but hedge funds live for these couple of points and at least I wanted to show you how they get them.

It is that simple.

Now what happens if we don't get a number bump from any of the analysts?... What happens if I'm wrong by Tuesday?...

Okay, here's another lesson in trading...

You've got to cut your losses. You simply have to sell the stock.

Either way, whether I'm right or wrong, the discipline of trading is simple... you buy for the catalyst...

When the catalyst occurs... the conversion... that causes panic, you sell no matter what... even if it's at a loss. Which, again, is why you limit the price you pay...

You cannot turn a trade into an investment. There's no long-term case for owning Radio Shack... And, if you hang out after the catalyst... you lament a reason to own it... you like the fact that Circuit City is gone... you're only going to get hurt.

For most of my trading life, the goal has simply been to keep my bat on my shoulder until someone throws a fastball that's slow, or a curve that hangs...

I think that buying this stock below $15 is that kind of pitch...

Here's the bottom line...

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