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As if there weren't enough worries weighing down RadioShack Corp. (RSH) shares, add the company's dwindling market capitalization to the list.
Fort Worth, Texas-based RadioShack, which has transformed its operations from an all-purpose tech retailer to a more narrowly focused mobile-device retailer, has seen its stock price slump in recent months amid margin pressures from its disappointing T-Mobile business, increased competition and weakness related to its kiosk business.
The stock has lost more than a third of its value since October. RadioShack now has the lowest market cap in the Standard & Poor's 500 index, prompting concerns that it could be in danger of getting delisted from the index, a process that potentially could further weigh on the stock.
To be sure, a de-listing isn't imminent and a company with the lowest market cap isn't automatically the first to go when S&P announces changes to the index. But analysts caution that if a de-listing were to occur, it would provide further uncertainty for the troubled stock.
"It would be more of a near-term trading issue rather than a longer-term reason to want to buy or sell the stock," said Brad Thomas, an analyst for KeyBanc Capital Markets.
The S&P 500 aims to emulate the broad U.S. economy and reflect changes in both consumer behavior and the overall marketplace. There are generally about 30 changes in the S&P 500 throughout a typical year, usually due to mergers and acquisitions. In 2010, there were fewer changes because of less deal activity.
"We generally don't comment on stock price movement, specific market indexes, listings, movement on or off indexes," RadioShack said in an email. "We are entirely focused on our business operations and on creating value for our shareholders."
RadioShack, which has been a member of the S&P 500 since March 1973, currently has a market cap of about $1.5 billion, according to FactSet Research, which is line with that of companies who recently have been booted out of the S&P 500.
While a company's market cap must be at least $4 billion to be considered for inclusion in the S&P 500, there isn't a set threshold for removal. Also, unlike the Russell indexes, which are reconstituted annually, there is no set schedule for changes in the S&P 500.
Howard Silverblatt, S&P's senior index analyst, said S&P looks at whether a company is the best representation of a particular market before deciding whether it should be taken out of the index. Even though RadioShack's market cap is well below the minimum threshold for inclusion doesn't mean it will be the first to go when changes to the index are announced.
Stocks face selling pressure when they are removed from the S&P 500 as index managers rebalance their portfolios. Silverblatt estimates 11.4% of the shares of S&P 500 constituents are held by licensed index funds or managers, with more emulating the index.
S&P attempts to give the market a one-week notice before dropping a component, which attempts to limit volatility, Silverblatt said. But once a company gets eliminated from the index, its stock generally faces selling pressure as index funds are forced to liquidate their positions in the outgoing component.
"The worry is you get a period of time where any index fund that's set up to track the S&P 500 needs to sell RadioShack stock," KeyBanc's Thomas said.
RadioShack shares Monday were recently down 2.7% at $14.47.
RadioShack is suffering from declining margins mainly due to disappointing T-Mobile sales; worries about its kiosk business, which is moving to Target Corp. (TGT) from Wal-Mart Stores Inc.'s (WMT) Sam's Club; and an ongoing management turnover.
Still, not all is negative for RadioShack's stock price. It has long been a favorite of the takeover rumor mill as reports last year pegged Blackstone Group LP (BX) and even Best Buy Co. (BBY) as potential suitors. Also, the stock already trades at a cheaper valuation than peers Best Buy and HHGregg Inc. (HGG), a regional appliance and electronics retailer.
As a result, KeyBanc's Thomas said any RadioShack stock weakness related to an S&P 500 change should be viewed as a buying opportunity.
"We believe that some of the near-term fundamental headwinds are balanced by a higher degree of cash flow and inexpensive valuation," Thomas said.
-By Steven Russolillo, Dow Jones Newswires; 212-416-2180; email@example.com