Remember the last time BlackBerry (BBRY) dropped more than 7% in day? Yes it was on the morning of the Z10's US launch, and that drop too had nothing to do with facts or fundamental data points; the down move was due to a ridiculous piece of news from WSJ and CNBC telling investors that the BlackBerry Z10's US launch had "failed" because there were no lines of people queuing up at AT&T (T) stores to buy the new device. On that day I thought that there could not be a more absurd rationale to scare investors away from a stock. However, yesterday I realized how wrong I was, after reading a "report" citing Detwiler Fenton suggesting that the users are not liking the Z10's UI, and "in several cases, [BlackBerry Z10] returns are now exceeding sales, a phenomenon we have never seen before." Must be quite a strange phenomenon because I can't imagine how returns could exceed sales either. However, smarter bears pointed out that the analyst was probably talking about the rate of returns exceeding the rate of new sales. Regardless, there are many aspects of this "report" that I find questionable, which I will discuss in this article.
Detwiler Fenton Group offers financial services including equity research, investment management, trading, brokerage and related services to institutional clients. Since the group offers equity research and also manages investments for its clients, there could be a potential conflict of interest issue if the group's equity research division writes a report on a stock in which the investment management division of the group has a position. I'm sure that if any such conflict of interest did exist, it would be fully disclosed in the original research note on the subject stock in line with SEC guidelines. However, since the public investors only have access to a small extract from the original research note through media, they would not find out about the existence of any possible conflict of interest. That is why, I believe, that sell-side analysts' recommendations appearing in the public media should be taken with a pinch of salt.
Detwiler Fenton has had a consistently bearish view on the BlackBerry stock. Detwiler's analyst Jeff Johnston expected BlackBerry to ship just 400,000 BlackBerry 10 units in Q4 2013; now we all know how wrong that estimate turned out to be. And this is not the first time that it has called the BlackBerry Z10 unintuitive; in a research note released on March 21st, the analyst said: "It seems that after users overcome the unintuitive nature of the UI (swiping in particular) and get more comfortable with the OS, they enjoy using it." The analyst also reported before the Z10 launch that the device's pre orders were "light" and "well below expectations," which is a very vague statement.
Maybe the original research note has more detail on this subject, but in the comments that I have seen on various websites, the analyst mentions absolutely no evidence to support such a sweeping statement about excessive returns other than "we believe." What I don't understand is that how is it even possible for Detwiler Fenton to make such a huge statement without surveying hundreds of retail stores throughout the US? I highly doubt that they went through such extensive research because if they did, they would have given much more detail than "we believe."
I admit that I don't have resources comparable to an institutional research group, but the research I have done through my limited resources conflicts with what Detwiler Fenton has reported. I have read through the various user reviews posted on AT&T, Verizon (VZ), T-Mobile, Amazon (AMZN) and Best Buy (BBY) websites and have found users to be extremely satisfied with their purchases. In fact, if you go through the reviews yourself, you will notice that the majority of the buyers are commending the user interface for being incredibly intuitive and easy to use. I wonder on what basis Detwiler Fenton has labeled the Z10's UI as unintuitive.
Detwiler Fenton's report on the returns also doesn't fit in with the extremely successful Z10 launches throughout the world, with no reports of a high number of returns or complaints about the user interface from any other country. This begs the question: are Americans really that different from consumers around the world that they can't understand BB10's UI, or is it that the high rate of returns in other countries just not being reported? Or it may be it's just that the returns issue has been highly exaggerated. Moreover, even if the Z10 is selling below expectations in the US, it's not the end of the world. It is common knowledge that the US market is no longer BlackBerry's stronghold like it used to be; if the Z10 is selling well around the rest of the world, then BlackBerry has nothing to worry about.
In my earnings review of BlackBerry's Q4 2013 results, I had predicted that the stock will move more on analysts' remarks rather than fundamental data points. Unfortunately, that turned out to be true. BlackBerry has responded to the speculation regarding the excessive returns, calling such reports completely false but I doubt if it will have an immediate impact on the stock price. However, BlackBerry's denial means that either BlackBerry is not giving us the true picture, or Detwiler Fenton's report is inaccurate. Both parties have a potential conflict of interest in this scenario so I can't tell you who to believe, but I know who I'd rather trust. It is entirely possible that Detwiler Fenton's report is based completely on true facts and was issued with the best intention to warn its clients about the risks of investing in BlackBerry. However, it's scary how easy it is to manipulate a stock price by publishing such sell-side reports in the media without presenting any supporting evidence or giving any conflict of interest disclosure. My advice: do not completely ignore the negative comments coming from sell-side analysts because they might be right, but keep in mind that these analysts are not always right.