I love turnaround plays. Great comebacks usually start with stocks that are in the depths of depression, so unloved that the share price reflects only bad news. If you are among the early buyers at the first signs of a turning tide, your portfolio can be richly rewarded.

I told you about a possible turnaround at Office Depot (NYSE: ODP) back in September. Shares are up more than 50% since then — even though the company’s actual turnaround efforts are only beginning. Today, I see a similar scenario for RadioShack (NYSE: RSH), which could start to rally for multiple reasons.

Stumbling, but not broken
RadioShack is simply a good business model in need of the right strategy and a bit of good timing. The electronics retailer brought in retail veteran Julian Day (an investment banker who helped bring Kmart out of bankruptcy) back in 2006 to help boost results. He recently announced plans to leave this May, with little to show for his five-year tenure as CEO. Sales remain stuck in the $4.0-$4.5 billion range, and earnings per share (EPS) are slightly below the peak levels seen in 2004 and 2005.

What he inherited still remains: RadioShack is a free cash flow (FCF) machine. Cash has risen from about $200 million at the end of 2005 to a likely $1 billion at the end of 2010. (Some of that growth in cash is the result of a decision to take on debt, which is currently around $600 million.) That robust cash-flow generation has enabled RadioShack to reduce its share count from 184 million in 2001 to less than 120 million now. RadioShack recently boosted its buyback plans (the current authorization stands at $500 million), and the share count could move to about 110 million by the end of this year.

Yet the strong cash flow and impressive buyback also underscore a flaw in Day’s turnaround strategy. In a bid to boost EPS, he took a conservative approach to advertising and merchandising, which explains why same-store sales numbers have been stuck in neutral for quite some time. The question for investors is how this retailer, with more than 4,000 company-owned stores, can unlock shareholder value. I think several paths exist to push shares higher.

Fix or sell
Back in the spring, RadioShack’s shares approached $24 as rumors of a sale of the company spread. No such sale took place and shares now sit near $16. Julian Day’s planned departure has renewed the buyout speculation (though without the attendant share price rise this time).

A buyout may or may not happen, but I like the stock as standalone entity. All that’s really missing is a hot new item to drive traffic to stores. And when customers come to RadioShack in search of a key item, they often leave with a range of other small electronic doodads — from batteries to Bluetooth audio sets to iPhone docking stations. So a magnet to attract traffic is essential. Could that be the coming explosion of Android-related products?

RadioShack has largely missed out on the frenzy for Apple (Nasdaq: AAPL) products, but with each passing month, more and more Android-based smartphones and tablet computers should be hitting the company’s shelves. This trend will really kick in starting in April, so expect to see tepid results from RadioShack in both the December and March quarters. (2010 Fourth-quarter results are to be released next Tuesday, Feb. 22; a recent pre-release implies that EPS will be about $0.50, below the recent $0.66 consensus.) But also look for the earnings conference calls to sharpen the focus on the company’s Android-directed merchandising strategy. Also listen for early discussions of Web-connected TVs and devices that can help older TVs easily connect to the Web.

Bad news priced in
For stock prices — as with politics — it’s all about the pattern of news flow. And recently, it’s been pretty bad for RadioShack. The company will miss out on the iPhone revolution, and a the decision to start selling the phones through Verizon (NYSE: VZ) likely means diminished sales for RadioShack partner AT&T (NYSE: T).

In addition, it was announced on Jan. 4 that a lucrative contract to operate kiosks at various Sam’s Club stores will not be renewed. Instead, RadioShack plans to have about 1,450 kiosks in Target (NYSE: TGT) stores by June 30, but the roll-out will take some time, which explains why profit forecasts for 2011 and 2012 were recently lowered by about $0.25 a share

Looking ahead, the news flow is likely begin to take on a more positive tone. For starters, most analysts have yet to factor in the massive share buyback into their forecasts, so look for EPS projections to rise as the share count drops. Second, the retailer is likely to ride the coattails of the coming wave of tablet computers with a steady stream of new product announcements.

This is a business model where a little growth goes a long way. Sales were stuck in the $4.2 billion area for three straight years and were likely be just below $4.5 billion in 2010. Yet with high fixed costs, any incremental sales gains will flow to the bottom line. Right now, analysts think sales will grow less than 2% in 2011, which is less than the rate of price increases, so unit sales growth is actually forecasted to be negative. Yet RadioShack’s product lineup will arguably be more compelling in 2011 after an admittedly lackluster 2010. Moreover, if employment trends start to improve in coming quarters, as many suspect, then this in one of many retailers that will benefit from a rebound in consumer spending.

Action to Take –> If RadioShack can latch on with just a few hot products, sales and profits are likely to exceed very low forecasts for 2011 and 2012. If new products fail to gain traction and the company just muddles along, it will still be a cash-flow machine, buying back yet more stock.

In the former scenario, I see a move up into the low to mid $20s — good for a gain of at least 30%. In the latter scenario, shares will likely be range-bound, and the former scenario just gets pushed out another year. The charm of this business model is in the product cycle. Catch it when the cycle is turning up, and RadioShack wins many more fans in the investment community and the stock goes up.