Before you leave for Spring Break, answer this riddle. What do RadioShack (Ticker: RSH), College Pizza, Penn Engineering, Gregory College House, and the Chinese restaurant on 40th (Not Beijing) all have in common? They are all living in the shadows of more glamorous rivals and struggling to gain popularity amongst the Penn community.

Just as Penn alumni can attest to the makeover the once run-down 40th St. received less than a decade ago (freshman, you’ll have to trust me on this), RadioShack is in the midst of a turn-around. Through disciplined cost-cutting at all levels of their business, their street-credibility is on the mend.

RadioShack, the little store with the antiquated name, is far from the most glamorous place to shop. Small, cramped, and bland, shopping there is like visiting Hill College House. Most students would turn to rival Best Buy (Ticker: BBY) for an iPod, or Circuit City (Ticker: CC) for an Xbox.. RadioShack is known for its radio-controlled cars and its wide assortment of store-brand wires, cables, and other electronics.

Many Ivy-Leaguers would never fathom purchasing “store-brand” anything, opting for the more expensive name-brand equivalent. It turns out this business is more lucrative than it is fashionable. Since RadioShack sells mostly commoditized goods, they can find the cheapest producer (aka China), slap on their label and pocket the profits with no third-party company sticking their hand in the pot. A quick and dirty check on Reuters.com shows RadioShack’s gross margins are 46.7 percent compared with Best Buy’s 24.7 percent. Turns out you don’t have to be as flashy as your competitor if you can operate more profitably.

This past Tuesday, China sneezed and global stock markets tumbled. RadioShack was one of the few who spiked 15.7 percent to a high of $26.24 after their earnings shattered previous expectations. By cutting costs, their profits were far greater than what industry experts had predicted.

Coming down slightly to $24.80 Thursday, this stock may be due for further pullback in the coming days. As people sell shares to lock in the profits from this week, I would strongly recommend picking up some shares in a week or so when the sell-off is over.

Sometimes the best investment ideas come from places we least expect. Don’t be fooled by the hype (or lack thereof). Unlike College Pizza and Engineering, the remodeling at RadioShack is for real.

This entry was posted on Monday, March 5th, 2007 at 4:29 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.