Novice Investing - Short Circuit at Circuit City

Date: Friday 05th 2008f September 2008 05:36:27 PM

Short Circuit at Circuit City - 05/01/2007

By: Hari Wibowo

Over the course of the year, investors would do considerably well by investing in beaten down retail sectors when they experience short term problem. Many winners of the past twelve months include: RadioShack Corp. (RSH) up 107% from the low, Jo Ann Stores Inc. (JAS) up 140%.

If you stretched it up for the past decade, the list grows longer which includes Circuit City (CC) up from $ 5 to $ 30 at one point, Guess Inc. (GES) up from $ 3 to $ 39 recently and so on. Therefore, when there is retailers beaten down for some reason, we would be intrigued to sniff around and investigate. Why would we be interested in a beaten down retailers?

First, retailer acts as an intermediary between manufacturers and consumers. The reason why manufacturers do not sell direct is because of the costly distribution channel it takes to reach the maximum number of customers. Good retailers can do that for them. Furthermore, most retailers have great prime real estate locations at their hand. While they may not own the place, by leasing the building, they have the right to use it for years to come. Thus, many years of sales would come from the prime real estate. Therefore, investing in a retailer would yield a decent investment if the price is right.

Still, retailers do not operate in a vacuum. They do have competitors from other retailers with its own prime real estate location as well. Thus, buying a beaten down retailers is not a sure path to rich. Rather, we should analyze whether the struggle is temporary or permanent.

This brings us to the latest retail candidate which is Circuit City Inc. (CC). As pointed out earlier, Circuit City had its own share of struggle but had since manage to climb from $ 5 to $ 30 from early in the decade. Just yesterday, however, the company announced that it would be reporting losses for the just ending Quarter. The company blamed lower average selling price for flat-panel TV, which had been a huge driver for sales growth.

Early indication points to lower share price at Circuit City, which tumbled as much as 11% from yesterday's close. At that point, Circuit City is trading at roughly 1/3 cash on its balance sheet. Still, over the long term, I feel that it is hard for Circuit City to earn over $ 1 per share consistently. This is not the first time it had struggled. If it can do a quick turnaround, share price would rocket as fast as Radio Shack recently. At this point, however, it is difficult to judge the extent of Circuit City's struggle. Is it due to short term pricing problem as the company indicated? Only time will tell.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Circuit City Inc. (CC) or any other securities.

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