Seeking Alpha
Long/short equity, deep value, special situations, contrarian
Profile| Send Message| ()  

You gotta a love analysts. Ever since I can remember, there is one thing I have noticed when reading analyst reports: They are way behind the curve, compared to the market.

Peter Misek of Jefferies & Co. today upgraded Research In Motion (RIMM) from underperform to hold, raising his price target from $5 to $10.

The question is: What's the reason for this upgrade, if the stock is already at $10? How is someone supposed to use this Jefferies report if the only thing the report tells us is that the target price for the stock is where the market is trading the stock at the moment?

This also works in the opposite way. Meaning, a stock has a target price of $20, starts falling and finally goes to $10 -- and then an analyst comes out and says company XYZ's target price is $10.

I have yet to read an analyst report (and I have read several thousand) that makes some kind of prediction based on data and assumptions as to where a stock might be several months in the future. For the most part, analyst reports simply reaffirm today's stock price and nothing else.

As such, don't read analyst reports unless the analyst has the guts to stick his or her neck out and help investors profit by specifically telling investors to buy XYZ stock today, with a specific target price in the future. What is the point if a report simply tells us what the market has already discounted?

Having said that, Peter Misek in his latest report gives us (via Barron's) some insight on RIMM. The tone is not that bullish because, as he states, the possibilities are low. But what is important is the potential, if things go well. He writes:

Thus we were surprised that the preliminary results from our quarterly carrier survey showed strong positive initial carrier feedback on BB10 (who admittedly have every incentive to be bullish). Additionally we believe RIM will be swinging for the fences with BB10 and will have significant presence at MWC and potentially even at CES. Our theory is that carriers see BB10 as one of the last chances to avoid being locked into a long-term smartphone OS duopoly.

OK, so we now know that carriers would like RIMM to succeed and will probably help any way they can, if they can. Note that the carriers are charitable organizations, but they have a vested interest in seeing RIMM succeed. Overall, that is a good thing for RIMM. And then he says:

Despite better prospects we estimate only a 20%-30% probability of success for BB10 as consumer demand will be the ultimate determinate; however, we see BB10 success (which would also increase the potential for licensing) leading to a ~$43 stock in 12 months. We see an upside scenario to 43M handsets in FY14 (Feb) and a rebound into the mid- 20%s for hardware margins. This could lead to $4 in EPS with another potential ~$0.25 in licensing fees ($10/handset fee and Samsung selling 20M BB10 handsets (~10% penetration)). With a 10x multiple, which we think would be reasonable considering RIM's potential CY14 prospects, the stock could reach $43. (emphasis added)

So Peter Misek sees the possibility that RIMM might actually be worth $43 in only 12 months for now! Is this a typo? No, not at all. Please remember that I have basically said the same thing in my previous reports on RIMM. While I did not give a specific number, I instead used the term "five to 10 bagger."

Personally, I think Misek is conservative on RIMM -- I think it could possibly sell more than 43 million handset units. I think the new RIMM phone has a much higher potential. He also states that he sees a relatively small possibility of all this, in the range of 20%-30%. Here, also, I think he is far too conservative.

I have been pretty bullish on this stock for a while. And while in the beginning it was a pure speculation play, I have upgraded RIMM to a special situation play. (Please read my logic here.) If this special situation play plays out even to 50% of its potential, then the target price can easily go to $20-$30 in 12-24 months from now, based exclusively on Misek's numbers.

So the question is: Why does this stock not have a buy rating, if it has the possibility of going four to five times higher from where it is today in 12 months? This is what I don't understand about analyst reports.

Yes, I can understand the speculative nature of RIMM before we get some feedback as to actual sales. But the problem is when we do see conformation of 43 million handset sales, the stock will already be at $43. What good will it be to read a report 12 months from now, giving us (for example) a target for RIMM of $47? So while I give thumbs up to Misek for coming out and making an analyst's call, I still think he is far too conservative in that call.

Bottom Line

For investors who want to take a little added risk, I think that RIMM is one of the best plays at the moment. Personally, I don't think this stock is that risky, but even if it is, the possibility of seeing this stock at $43 in12 months is enough to compensate for that additional risk. If I'm right, the risk/reward possibilities are in our favor.

Source: Research In Motion - Possible $43 Stock Price In 12 Months?