Carl Icahn is a master of short squeezes. I remember way back when Netflix (NFLX) traded at about $60/share and then Mr. Icahn formally announced a substantial stake in the company. Since then, shares have significantly outperformed the broader market in just a few short months. While I believe that a substantial part of Icahn's call to take a stake was due to having real insight into the future of the business, I also believe that a good chunk of this massive run is somewhat self-fulfilling on Icahn's part. With rumors swirling that Mr. Icahn has bought into BlackBerry (BBRY), is it time to hop on board that train?
See, the thing that I love about Carl Icahn is that he seems to absolutely despise short sellers. Now, not that there's anything wrong with short selling (no, it's not evil - get over it!), but it seems that Mr. Icahn very strategically picks out decent businesses (i.e. not hugely in debt and not in dying industries) that have massive short interests and essentially tries to make significant returns on these decent-probability turnaround plays.
See, Netflix wasn't overburdened with debt, was in no real danger of becoming insolvent, and made a product that, while not exactly a cash cow (yet?), was very instantly recognizable and an increasing part of everybody's lives. In a bull market, it's really easy to "sell" this kind of story to investors, and when the company - whose stock had been shorted into the ground and left for dead - finally starts seeing a rebound in its fundamentals, not only do you get a massive round of short covering, but you get a whole lot of panic buying, especially from retail investors. These two factors not only fry shorts, but also heftily reward longs and the call buyers.
What About BlackBerry, Then?
Well, for starters, BlackBerry is highly shorted. According to the most recent short interest data, roughly 164 million shares were sold short:
What's even more interesting is that despite this huge bull run, the shorts appear not to be scared out of their positions - the long term shorts seem to be adding! To me this signals that the shorts are absolutely convinced that BlackBerry's turnaround play is going to flop, all of the cash is going to be burned, and they are confident in their ability to cover at much lower prices (dyed-in-the-wool shorts try to short stocks that they will never have to cover). Are they right?
Who Knows, But It's The Story Today That Counts
In the long run, we're all dead, right? Whether BlackBerry is around for the next 20 years or the next 200 years, I cannot hazard a guess at. It's not a dividend growth stock; it's a fallen momo stock that still trades at a mere fraction of where it did before things went sour. My personal view? It's going to be really tough to encroach on the increasing dominance of Google's (GOOG) Android platform, especially as everybody from the top-tier hardware vendors to the cheapest vendors will all standardize around this common platform (albeit with their own software enhancements).
Microsoft's (MSFT) Windows Phone is having a tough enough time, but I think that sheer resources and brand recognition might get them some real market share over the next year or two. Apple's (AAPL) always going to have its user base, albeit I think growth for them will continue to slow and perhaps go negative sooner rather than later. So how does BlackBerry truly compete?
Well, BlackBerry 10 is a good OS, but the average user doesn't want a phone that's not easily classifiable like an "iPhone" or a "Droid". Further, while the BlackBerry 10 hardware is decent, it's certainly nothing Earth-shattering in terms of processing speed, screen resolution, etc. The thing that I'm most bullish on is the fairly unique in this day-and-age form factor of the Q10, which I think has the potential to really bring back growth.
But the point is, I don't actually know, and for "story" stocks, it's not about the actual future, but instead the perceived future. If Q10 starts to get some positive press, and maybe if we see a few quarters of real market share gains, then I suspect that Mr. Icahn buys in - if he hasn't already. Why? Because when you have a high short interest and a legitimate, verifiable, easily-recognizable story to sell, then the sky's the limit on the share price. Traditional valuation metrics go right out the window, and it's a pure supply/demand game - and the short interest certainly helps to amplify this ratio in favor of the longs.
As soon as there is verifiable evidence of a "story" behind BlackBerry (although I would argue that there is a pretty clear one in place now that needs to just play out), I could see Icahn taking a stake in this stock. It's debt-free, cash-rich, and is heavily shorted. Icahn knows that he could make a killing off of such a scenario, and he has done this sort of thing many times in the past.
You may not agree with me that it's probably time to buy BlackBerry, but if you're thinking about shorting it, you may be in for a nasty upside surprise.
Additional disclosure: I may go long BBRY at any time.