3 Reasons RadioShack Is a Value Trap

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NEW YORK ( TheStreet) -- Actions always speak louder than words.

That is especially true when it is a retailer slamming the doors shut on about 500 stores, as RadioShack is doing . For those looking to profit, it will be almost impossible to find any shares of RadioShack to short as the float is already over 45%, according to Yahoo! Finance .

For those considering going long on RadioShack, don't.  RadioShack is a classic value trap, not a value play.

As detailed in a previous article , the retail sector is filled with value traps such as Sears Holding , J.C. Penney and Bon-Ton Stores .

A value trap is company that looks to be undervalued due to how low the stock is trading on a price-to-book and price-to-sales ratio. With a price-to-sales ratio of 0.06 and a price-to-book ratio of 0.57, RadioShack certainly appears to be a value play. But those ratios are not a result of the market inefficiently pricing RadioShack.

Its sales are plunging. Sales growth for the past five years was flat. Quarterly sales growth is down by 10.30%. Same-store sales are down 8.4% for the most recent quarter. There is no missing value in the sales aspects of RadioShack as it is clearly on a downward trend for sales, which is the lifeblood of a retailer.

Another reason this is a value trap: The assets are not undervalued.

As with many other retailers, the real estate of RadioShack has been touted as being valuable. It is not. There is one billion square feet of vacant real estate in the United States, according to Urban Land Magazin e. Sears has 118 closed stores already available . J.C. Penney recently announced that more stores were being closed. Dots LLC, a fashion retailer, just filed for bankruptcy and is trying find a buyer for more than 400 stores. Now add 500 additional stores from RadioShack to that pile of empty brick and mortar.

Finally, RadioShack is a horrible business enterprise with no upside.

It is losing money with a negative profit margin of 7.20%. There is a huge debt load that has to be paid from the falling sales that lose money, too. The debt-to-equity ratio for RadioShack is 1.27. That means that it required $1.27 in borrowing to create every dollar in equity. The return on equity for RadioShack is a negative 52.80%, so heaping on that debt was hardly in the best interest of the shareholders!

When the share price jumps -- as it did Monday after its successful Super Bowl commercial -- those long should sell. If that somehow provides an opportunity to short, do it. RadioShack has 100.1 million shares outstanding with $3.13 in cash per share on the books. At present, according to Finviz, its income is a negative $263.90 million. This does not leave RadioShack with much time before its cash runs out, especially when it is losing money with falling sales and a ton of debt.