I am the opposite of an early adopter, I would say I'm more accurately described as an "indifferent eventual user".
My wife bought me a 70 inch flat screen (I suppose they are all flat now) to watch football on and to be honest I barely notice the difference.
I've got an Android instead of an iPhone because at the time I signed up for it the Android seemed like less of a hassle.
As you might imagine then, I'm not really into investing in technology companies....
That means that I've got no real opinion on the BlackBerry (BBRY) product. And it seems to me that when you are investing in a consumer product like this, an opinion on the product's quality is something you had better have.
I guess that is partly why I still don't understand value investing legend Prem Watsa's investment in BlackBerry.
Now before you jump all over me, please realize that I'm not saying that Watsa is wrong. In fact he could and likely is spectacularly right.
But when I apply what I've learned about value investing from investors like Watsa, his BlackBerry moves seems a bit surprising.
Of course we are all familiar with BlackBerry which is the company that produces the BlackBerry smartphone. For years the word BlackBerry was interchangeable with smart phone. BlackBerry had the only game in town.
While BlackBerry dominated the smart phone world its revenue exploded up from zero to $20 billion in the span of 15 years. Aren't monopolies grand?
Success unfortunately attracts competition and for BlackBerry that competition came from Android and Apple (AAPL).
Both BlackBerry the product and BlackBerry the stock have fallen out of favor with their respective markets in a big way. The BlackBerry with the smart phone user and BlackBerry with the stock market investor.
BlackBerry's share price which was once $140 crashed to as low as $6.50 in 2012. And the actual business suffered as well.
Sales for BlackBerry have plummeted from over $14 billion through the first 9 months of 2011 to just over $8 billion in 2012. Operating income has dropped from a profit of $1.2 billion in 2011 to a loss of $720 million in 2012.
Now, I like dumpster diving as much as the next guy and I prefer to invest in companies with share prices that are beaten down as well. But at no point did BlackBerry interest me, simply because I have no clue where revenues, earnings and cash flows for this company are going in the future.
And that is why I don't fully understand Watsa's investment. Prem is a world class value investor, and to be a value investor I believe isn't it essential that you can "Value" a company before you invest in it?
How was Watsa able to get comfortable with what BlackBerry's cash flow would look like over the next ten years? What made him think that the BlackBerry brand wasn't permanently impaired? How in a business where you have to reinvent your product every two years to satisfy consumers could Watsa be confident that BlackBerry could do that going forward?
In recently released 2012 Fairfax Financial (FRFHF.PK) letter Watsa gave us some detail on the reasoning for his BlackBerry investment:
Markets fluctuate - and very often in extreme directions. Remember the tech boom, when companies with no sales were valued at tens of billions of dollars? In 2000, Northern Telecom accounted for 36.5% of the Toronto Stock Exchange index and was worth almost Cdn$400 billion; by 2009, it was bankrupt!
Well, last year the opposite happened to Research in Motion (now known as BlackBerry). At its low of approximately $6 1⁄2 per share, it sold at 1⁄ 3 of book value per share and a little above cash per share (it has no debt). The stock price had declined 95% from its high!
The company got complacent, perhaps overconfident, and did not respond quickly enough to Apple and Android. Mike Lazaridis, the founder and a technological genius - and a good friend - asked me to join the Board, which I did after meeting Thorsten Heins, whom Mike recommended as the next CEO of the firm. Thorsten's 27 years of experience in all types of leadership jobs in small and large divisions at Siemens, combined with his five years at BlackBerry, were exactly what was needed.
Thorsten hired a very capable management team and then focused on producing a high quality BB10 - the next generation of BlackBerries. The brand name, a security system second to none, a distribution network across 650 telecom carriers worldwide, a 79 million subscriber base, enterprise customers accounting for 90% of the Fortune 500, almost exclusive usage by governments in Canada, the U.S. and the U.K., a huge original patent portfolio, an outstanding new operating system developed by QNX and $2.9 billion in cash with no debt, are all formidable strengths as BlackBerry makes its comeback!
The stock price recently moved as high as $18 per share, a far cry from the $140 per share it sold at a few years ago. And please note, 1.8 billion cell phones are sold worldwide annually, and of the 6 billion cell phones in the world, only 1 billion are smart phones. Lots of opportunity for Canada's greatest technology company!
What is striking, even for a person like me who has seen many bull and bear markets, is that at $6 1⁄2 per share, all the Wall Street and Bay Street analysts were uniformly negative - just as they were uniformly positive only a few years ago at prices north of $100 per share. John Templeton's advice to us: "Buy at the point of maximum pessimism", still rings in our ears!! We own approximately 10% of the company at an average cost of $17 per share and we are excited about its prospects under Thorsten's leadership and Mike's technical genius.
I will first note the fact that BlackBerry has a pristine balance sheet with cash of $6.50 per share and no debt, so this company has time on its side.
If Watsa was buying most of his shares around that cash balance of $6.50 per share (or somewhere close to it) this investment would make a lot of sense to me. That would be a classic Benjamin Graham investment where the balance sheet actually supports the stock valuation and the operating business was being acquired for nothing.
But Watsa wasn't just buying shares of BlackBerry near the lows. As he details above in his letter his AVERAGE cost is $17 per share which means he was also buying shares at considerably higher prices. To me that means Watsa is betting that the BlackBerry product is going to continue generating significant cash flow for a long time to come.
Given the rapid pace of change in the technology world that seems like a bit of a strange bet for a value investor like Watsa to be making.
Warren Buffett has famously said:
"I don't try to jump over seven-foot bars: I look around for one-foot bars that I can step over."
To me, trying to predict the future of BlackBerry is like trying to do something I'm not capable of (jump over a seven-foot bar). I'm surprised Watsa feels differently, although I'll admit to being inclined to think he knows what he is doing.