Circuit City: Electric returns aren't a safe bet
— -- A: Circuit City has been short-circuiting the portfolios of investors who bet this company could turn itself around.
The seller of consumer electronics is in a tough position. The slow economy hurts sales of pricey products such as the large-screen TVs, digital music players and digital cameras that Circuit City sells. Many consumers, fearful of falling home values or worried about losing their jobs, can stick with their existing digital gizmos rather than spend the money to upgrade.
So, Circuit City has its work cut out for it. Shares are down 58% this year and are trading for less than $2. Is the stock worth taking a chance on at that price? To find out, let's put it through the four tests we consider at Ask Matt:
Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Circuit City's trading history back to 1984, we see the company generated an average annual compound rate of return of 103%. That is a healthy return, handily beating the S&P 500.
But to beat the S&P 500, you accepted risk — standard deviation — of 65 percentage points. That's 342% greater than S&P 500's risk during the period. So to get an 816% higher return you accepted 342% higher risk. As long as you can tolerate a stock that generates tremendous volatility, Circuit City stock passes this test.
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