The RadioShack lesson
How to spot a winner in the making -- while its stock is still in the doldrums. Plus: a plea for less beer, more kids at baseball games, from Fortune's Jon Birger.
NEW YORK (Fortune) -- It's now part of my morning ritual. I get my coffee, return a few phone calls, answer some email, and then type in my new favorite letters: R-S-H.
RSH is the ticker symbol for electronics retailer RadioShack (Charts, Fortune 500), and for me, checking it has become a guilty pleasure. RadioShack, you see, was one of the stocks I recommended last December in Fortune's 2007 Investor's Guide. Five months later, the Shack has risen 85 percent and is on the way to becoming one of my best stock picks ever.
I've made plenty of winning picks during the eight years I've been doing this, first at Money and for the past two years for Fortune (and had some clunkers too - don't get me started on Calpine), but I think the reason I've kept particularly close tabs on RadioShack is it was a departure from how I normally pick stocks. Over the years, my best picks have flowed from some broader theory on the economy or market - like recommending eBay (Charts, Fortune 500) in late 2000 when too many babies were being thrown out with the dot-com bathwater.
My reporting process is pretty straightforward: I start out by calling up fund managers, analysts and economists whom I trust. I take their pulse on the markets or sectors I'm interested in, and then use stock-screening tools like Baseline to cull my sources' umpteen investment ideas into a more manageable list.
With RadioShack, it was different - and a bit harder to justify to my editors. My faith in the stock was based almost entirely on a conversation I had with a single fund manager, Bob Olstein of the Olstein All Cap Value Fund (Charts) (formerly Olstein Financial Alert). When I got Olstein on the phone last December, the only stock Bob wanted to talk about was RadioShack. He was utterly convinced that new CEO Julian Day would replicate at RadioShack the kind of financial turnaround he'd helped engineer at K-Mart a few years earlier. (Sure enough, Day has done a terrific job cutting costs, trimming receivables and inventories, and improving RadioShack's earnings in the process. Day's next challenge, boosting top-line sales, may prove tougher.)
Now, normally I don't recommend a stock based on the premise of a lone fund manager. So why then did I make an exception for Olstein? Well, Olstein is an independent thinker in a business overpopulated with sheep. He's also a stickler for accounting rigor and disciplined financial management - someone who'll ask tough questions when he sees a disconnect between earnings growth and cash flow, for instance.
At least that's how I rationalized it in my head. In reality, the clincher was something more amorphous: Olstein was sure he was right. It's rare to hear a top fund manager express an extremely high level of conviction about any one stock. The typical money manager is so eager to be quoted in Fortune that if you crinkle your nose at one of his picks, he'll happily shift the conversation to the next. But when I raised doubts with Olstein about RadioShack ("Bob, have you been in a RadioShack lately?"), Olstein chewed me out.
"What I was chiding you about was this," Olstein now says. "Everybody wants to deal only with what they see, and what they saw with RadioShack was problems, problems, problems. Fact is, the only way you can get really good value is when everybody sees what they see, and you see something else."
When Olstein started buying RadioShack last year, he was actually encouraged by the fact that not a single Wall Street analyst rated the stock a "buy." "It's the portfolio manager's job," he explains, "to say, I think there's a reasonable probability that these problems are of a temporary nature, and if they are, this stock is highly undervalued given its strategic advantages."
The latest bounce in RadioShack stock came after an online columnist with another news organization pondered whether Dell (Charts, Fortune 500) should make a bid for RadioShack in order to acquire a bricks-and-mortar outlet for Dell's computers, digital music players and flat-screen TVs. Olstein was amused by the column. He says that in February he actually sent letters to both Michael Dell and Julian Day urging them to consider an alliance.
"You're the first person I've talked to about it," Olstein says. "But the fact is that [a Dell-RadioShack pairing] makes perfect sense. What a great match-up if Dell wants retail distribution. Ninety-four percent of the U.S. population lives within two miles of a RadioShack."
If Dell does make a bid for RadioShack, Olstein will be more bystander than beneficiary. Convinced the easy money has been made, Olstein began paring back his RadioShack position as the stock approached and then passed $30 a share. (It's now $31.)
One of the things I hope to do with this column is occasionally muse about topics not overtly related to business but that have a real tie-in nonetheless. First up in this effort is the horror that I witnessed Monday night at Yankee Stadium in New York.
Despite Major League Baseball's financial success in recent years, baseball seems to have a blind spot when it comes to cultivating young fans. World Series games routinely end at midnight - well past the bedtimes of most kids - and baseball's lack of community outreach has allowed rival sports ranging from basketball in the inner-city to skateboarding in suburbia to displace baseball in the hearts and minds of many youngsters.
In that context, you'd think that a premier franchise like the Yankees would care about making their stadium appealing to parents trying to pass along their love of the game to their children. Well you'd be wrong.
The combination of lax security and insanely permissive beer sales (I'd love to know what percentage of baseball concession profits come from people who consume more than three beers per game) turned Monday night's Red Sox-Yankees game into a fiasco. At least in the right-field upper deck.
Though I'm a Red Sox fan, I stopped wearing Sox caps and jerseys to the Stadium years ago. The obscenities (not to mention the beer and peanuts) routinely hurled at Red Sox-adorned college students and grandmothers alike would make Don Imus blush. On Monday night, it made me thankful I'd chosen to bring some friends to the game rather than my 7-year-old twins.
The low point came around the sixth inning - frankly, I could barely keep track of the game, the stands were such a zoo - when a drunk, college-age girl threw a beer at a Sox fan but missed and hit an even drunker Yankees fan. She stumbled over to apologize, but the guy was too angry to listen. He started mouthing off at her, the girl's boyfriend got involved, punches were thrown, and next thing I noticed was that the girl had a bloody face and her boyfriend had fallen down on top of some poor schmuck two rows below.
Is this sort of rowdiness unique to fans of the New York Yankees? Of course not. That's not my point. My beef is with a Yankees management that clearly puts a higher priority on squeezing every last beer sale out of its patrons than on tamping down on the ugliness - an ugliness that makes this fan unwilling to bring two baseball-loving seven-year-olds to the most celebrated baseball stadium in the world.