Most investors are aware that BlackBerry (BBRY) shares are heavily shorted, but do not understand the implications fully. I have read many comments from Seeking Alpha readers that illustrate confusion with the current shorting situation, and I am concerned that some assumptions will lead to incorrect investment decisions. The point of this article is to outline the present situation with BlackBerry, and how the shorting situation is being used by investors and traders. Being informed is the only way to make investment decisions.
BlackBerry shares have been trading between $14 and $16 a share since the launch of BB10. Within this timeframe there has been an ongoing battle between the "shorts", and the "longs". These battles are usually noted by price fluctuations, and a flood of negative and positive articles. If you are a follower of BlackBerry, this is not a surprise. The daily trading volume has decreased significantly as both sides appear to be reaching a stalemate.
Last week the financial quarter ended for BlackBerry, and the results will be announced on June 28th 8am EST. Many investors are waiting for this day in anticipation of a catalyst that will definitively drive the stock price one way or the other. I truly believe that there will be more questions raised than answered. Remember, the results will only contain 1 month's worth of sales data for the Z10 in the United States, and limited numbers for the Q10 depending on the market. While it will shed some light on the future health of BlackBerry, the September financial earnings call will be more definitive.
The BB10 rollout from BlackBerry is calculated and gradual. This has also allowed for a gradual buildup in the short interest for BlackBerry. It currently is around 170 million shares out on loan, and still increasing.
Avg Daily Share Volume
Days To Cover
With 515 million shares outstanding, this equates to 33% of all shares being shorted. It should also be noted that Prem Watsa's Fairfax Financial Holdings (OTCQB:FRFHF) is holding 51.8 million BlackBerry shares. Prem Watsa stated at the annual FairFax shareholders meeting that Fairfax is holding a long position with BlackBerry and anticipates shareholder value increasing over the next 2-3 years. The cost basis for FairFax financial holdings is approximately $17 per BlackBerry share.
Michael Lazaridis has a personal position in BlackBerry and holds 29.9 million shares. It is our understanding that Michael Lazaridis, as the founder of BlackBerry, maintains a similar outlook to Prem Watsa.
Assuming both of these investors will not loan out their shares, this implies a short interest around 40%.
There are a few more significant holders of BlackBerry stock including PrimeCap Management, but to extrapolate the short interest would not be accurate. The reason is that some of these shares may be on loan as per the internal policies and security commission rules. More on this later.
The table below illustrates the recent activity that has been occurring with BlackBerry shares from institutional investors. There does not appear to be any significant trends except for various institutions entering and exiting their positions. The net effect appears to be near zero.
# of Holders
Total Shares Held:
Holders With Activity:
Sold Out Positions:
As illustrated with the short interest versus price below, the increasing short interest is not sustainable with the increasing stock price.
Currently, shares available to be lent out to the "shorts" are becoming scarce. As the short interest increases, there are less shares available for loan.
Scotia iTrade (BNS) is one of the largest brokers in Canada. Last week I had a conversation with a Trading Manager and was told "there are no shares currently to be lent out." This changes on a daily basis, but has been the norm for the past month.
Other brokerage firms are reporting low supplies of BlackBerry loanable shares. I have checked Interactive Brokers (IBKR) about loanable shares, and they reported 250,000 available for shorting last week. Currently they have increased their loanable share supply to 550,000 shares.
Why would someone long BBRY loan out their shares?
Each BlackBerry share has a value, and the value is what the market will currently bear. If a BlackBerry share is loaned out, credit is being extended. As the owner of the share, compensation would be appropriate for loaning the share. Currently, Interactive Brokers is charging 8.25% with 8.16% being remitted to the share owner. Since these shares are callable at any time, it makes sense to loan the shares out while waiting for the stock price to appreciate.
Also, if you truly believed that the shares will appreciate over time and a short squeeze is likely, adding to the short interest could be desirable. While there would be short-term downward pressure on the stock price, the increased probability of a short squeeze would be desirable.
Research In Motion Ltd
Data from Interactive Brokers
Not all brokers will compensate the stock holder for loaning out the shares. Scotia iTrade charges a flat charge of prime + 1.5%. This equates to a carrying cost of 4.5% per annum for being short. As a side note, this also illustrates the revenue generation available for brokerages, where Scotia iTrade could theoretically lend out the shares at 8%.
There are many rules to shorting shares that the SEC regulates. Additionally, every brokerage has a set of internal rules that must be followed. I am not trying to go over every rule, but to highlight the general principles so sound investment decisions can be made.
I have heard of a technique to stop the brokerage house from lending out the shares that investors hold in long positions. Many believe a standing sell order at an artificially high price will stop the lending out of the shares. First, shares from many types of accounts cannot be lent out. Registered retirement accounts fall into this category as most cannot be margin accounts. Even within non-registered accounts (i.e. straight cash account) some brokers will not lend out the shares to the "shorts". Generally, if the account is setup on margin then the shares may be loaned out. This will be stipulated in the brokerage agreement that was signed when the account was created.
A quick reality check will verify if your shares have been loaned out. When shares are loaned out to the "shorts", voting rights are also loaned out. Of course these shares are callable at any time, but if the shares were loaned out, voting information would not be sent out to you from your broker.
Many investors apply a black and white logic that either you are "long" or "short" the stock. This logic is treated as exclusively, either or. It is possible that some investors can be long and short the stock, it all depends on the timeframe. If the investor feels that things will get worse before it gets better, then shorting the stock until it hits the investors floor price may be called for. The important concept is that some investors that take a short-term "short" position can fundamentally believe in the company. While I do admit playing both sides of the line is not the norm, it does occur and retail investors need to be aware.
What will the trigger be?
I have calculated the average entry price for traders shorting BlackBerry shares over the last 12 months to be $11.70 USD. The question now becomes how long can the "shorts" wait, and how high of a share price can the "shorts" tolerate. The high cost of borrowing around 5% to 8% is offset by the potential upside for the "shorts". With the share price being undervalued, there is little room for miscalculations at this stage of the game. I would anticipate that the end of September financial earnings call would be a significant day for decision making with investors. With the share price approaching $18 - $20 per share, I would expect some short covering. With nearly 50% of the outstanding shares owned by institutional investors, most of the "shorting" likely is being conducted by the non-retail investor. This is concerning as institutional investors have the resources to absorb some stock price appreciation, but I would not expect institutional investors to incur unnecessary losses.
I believe that the next two earnings calls will not be a definitive catalyst for the stock price. The current analysts' reports that are "short" BlackBerry shares, have articulated various reasons why the earnings calls are not indicative of long term success.
A major catalyst would likely require major news being released from BlackBerry, or a major carrier definitively acknowledging customer acceptance. Verizon (VZ) appears to be working closely with BlackBerry, and as a major U.S. carrier could initiate a short squeeze indirectly. This is likely not to occur until well after the next earning call.
There have been discussions about a short squeeze occurring by the loaned out shares being recalled for the annual shareholders meeting. This date was May 21st and is not a potential catalyst. The annual shareholders meeting information is included below and was obtained directly from BlackBerry or Research in Motion as it is officially known; At least until July 9th.
The Annual and Special Meeting of the shareholders (the "Meeting") of Research In Motion Limited (the "Company") will be held on July 9, 2013, at the Humanities Theatre, University of Waterloo, 200 University Avenue West, Waterloo, Ontario N2L 3G1, at 10:00 a.m. (Eastern Daylight Time)
To our shareholders,
We have decided to use the new "notice-and-access" system recently adopted by the Canadian Securities Administrators for delivery of this year's proxy materials. Under notice-and-access, you still receive a proxy or voting instruction form enabling you to vote at the Research in Motion Limited ("BlackBerry") annual and special meeting. However, instead of a paper copy of the management information circular and other proxy materials, you have received this notice, which contains information about how to access these materials electronically at the following website: envisionreports.com/BlackBerry. Electronic delivery reduces the cost and environmental impact of producing and distributing paper copies of documents in very large quantities. It also provides shareholders with faster access to information about BlackBerry.
WHO CAN VOTE
Holders of BlackBerry common shares as of 5:00 p.m. (Eastern Daylight Time) on May 21, 2013.