Breaking the Bargain Mentality with Rona Stock (RON) – Investor Question

Every once in a while I get emails from investors contemplating entering Rona Stock. The latest earnings announced today produced a number of emails from investors wondering if now was the time to buy at “bargain prices”. But is Rona Stock actually a bargain?

The problem that a lot of investors have is they look at a stock that they believe is “beaten up” and think they might be buying a bargain. This happens often. BlackBerry stock is another great example as was Nortel. On May 13 Rona announced that they had cut their loss in the first quarter to $14.4 million which was down from $18.3 million for the same quarter last year. What a lot of investors do not understand is that there is still a loss. This is a company in turmoil. Revenue fell 8 percent to $764 million Canadian. Basically then, this company is hemorrhaging capital. With still 24,000 employees and at least 500 stores under a variety of names, Rona simply cannot get its act together. This is not the kind of company to put capital to work in.

Rona Stock 5 Year Chart

The chart below from May 2009 to May 2014 shows the problem the stock is facing. A long-term pattern of lower highs. The company even instituted a dividend program in an effort to boost the stock but without success. The dividend has been 7 cents since the first payout on March 8 2011. Personally I think the 7 cents dividend is pointless when the company is continuing to face large losses.. Rona needs better management. In an already crowded retail sector, Rona simply cannot compete.

15Th Consecutive Quarterly Sales Decline

This quarter is now the 15th quarter of continuing sales decline. That has to be the best warning sign right there for investors. It is like a red flag warning investors to stay far away.

No Bargain Stock

When a name that many Canadian investors recognize like Rona or BlackBerry or Nortel run into trouble, many Canadian investors think the low stock prices represent a chance to “get in on the ground floor” or “get a bargain”. Nothing can be further from the truth. Millions of dollars were lost when Nortel collapsed and there have been many such stocks in Canada and many of these bankruptcies have wiped out investors.

Protecting Capital

We all work hard to build up our capital and yet many investors in a single moment forget the time spent building their portfolio and jump into a stock that is in trouble believing that the “turnaround” will make them rich. The problem is that for the majority of these companies there is no turnaround. Investors are wiped out when these companies disappear.

Knowing When To Buy

Instead keep your capital working in company names that have strong balance sheets and growing revenues. Perhaps some day Rona will turn the corner and the stock will be a buy again. But when that happens revenue will begin to grow and investors will know when it is time to get back into the stock.

Buying at what most believe is a bargain basement price on a company that is continuing to flounder is a dangerous game.

Break The “Bargain” Mentality

The best way to convince yourself not to buy into the “bargain” mentality on a stock with your hard-earned capital is to consider whether the company you are thinking about would be a long-term holding. Looking at the chart for Rona stock there is nothing compelling. If instead your goal by buying this type of stock at what you think is a bargain price would be to sell it when it perhaps doubles, then you know right from the outset that you plan to trade the stock.

If your goal is to double the capital you put into a floundering stock, you already realize your goal is not to own the stock but to trade the stock. That means you can definitely wait and not risk buying the stock until there are actual profitable quarters. When that happens a stock like Rona will finally move higher. That will be the signal to put capital to work to earn profits again. So it does not matter if the stock is at $10.00 or $15.00 or $20.00 when that happens because the stock will always have room to expand if revenues keep growing. Growing revenues will support higher valuations in the stock. That and that alone will be the time to risk capital again in Rona Stock.

There is always another trade and another day when it comes to investing. There is never a reason to risk capital in a stock stuck with red ink on the balance sheets.