Benjamin Graham once said "in the short-term, stocks are a voting machine and in the long-term, stocks are a weighing machine". I can testify to this because I have seen it over and over many times over the years in many different cases.
Let me give you one recent example.
On November 11, 2012 Groupon (GRPN) plunged by about 30%. The stock was coming from a very long correction and the previous day the market did not hear what it wanted in the conference call and everyone who had the stock hoping for a silver lining got disappointed and dumped the stock.
On that particular day I wrote my first article on Groupon (please consider: Groupon Finally Lands On Planet Earth). Let me remind you what I said then:
Valuation of Groupon has come down a lot. However I would not say that I am ready to buy this stock as of yet. A 30% one day drop usually means (from my experience) that the stock has further downside to go.
Having said that however, I like the business model of the company and the way management is adapting to change, for example offering a different product mix as described above (listen here to the company's conference call).
I also think this is a very solid company and the coupon business is not going away anytime soon. While it may just be that competition is a reason why their revenue has been flat over the past three quarters, at the same time however, I also think that this company is much better positioned than anybody else to do a better job in this business and produce growth and earnings for shareholders in the future.
Most importantly, the company is also within the valuation metrics of what I would pay for it. As such, I will wait a while for the dust to settle after Friday's drop, and see if this stock is going further south (as I think it will) before deciding to make a move.
While my recommendation was to wait a little for the dust to settle, I also said that if you see technical strength in the charts, buy at will. Since then the stock is up over 200% and today many analysts have price targets on the stock over $10, when at the bottom you couldn't find anyone that liked the stock.
The question is, what has changed since then and the market has rewarded Groupon's stock such a rally? The answer is basically nothing. The company is still not making money and the balance sheet is the same. The only thing that has changed is perception.
Groupon has new management and they are trying different things and the market seems to be pleased with management's directions, and as such is discounting a turn-around for Groupon and is pricing such into the stock. But fundamentally, there is nothing different about Groupon today, than when I first recommended it (in fact today I think it's a short, but that's another article for another day).
Now let's look at what's going on with BlackBerry (BBRY). The market for some reason was very disappointed with the company's recent quarterly results, even if, the company delivered better y-o-y results, the balance sheet is perfectly healthy and even if the company just rolled out a new operating system and new devices.
In fact looking back on the company's quarterly results, I think no matter what the BlackBerry earnings outcome was, the market would still have sold off the stock. The market was so bearish on the stock (as the short interest proved), that even if the company blew analyst estimates away, I am convinced that the stock would not have rallied.
However, like Groupon, BlackBerry was coming from a very long correction with a lot of disappointed investors. Like Groupon, BlackBerry's balance sheet was (and is) fundamentally very strong. The company has done an excellent job at cash management and I don't see any signs of bloated overstocking like many claim.
Like Groupon, BlackBerry has a niche product that stands on its own, even if the company might not become another Apple. In fact, if one takes out the Venezuela incident (the company should have alerted the market beforehand about it), the company's results were more or less what management said they would be.
The only problem with BlackBerry is with perception and nothing else.
So why should you buy BlackBerry today? Well, for the same reasons you should have bought Groupon after the 30% slide several months ago.
The company is very solid, with a unique product, catering to a very niche market and the only thing wrong is the perception the market has about the stock. And like Groupon, perception can change at the blink of an eye, for reasons that I cannot even begin to guess today.
One think is sure. BlackBerry is a cheap stock today any way you slice it and dice it. The stock is trading at less than book value and at 2/3 of its cash position with no debt. There are not that many companies out there you can find with such a cash pile to market cap. Remember when Apple (AAPL), for no apparent reason was also trading at two-thirds of its cash?
In addition, the company has just rolled out a new operating system and a new line of devices. Maybe the market didn't get the numbers it was hoping for, but this is not a company that will go out business. Like Groupon, I think eventually, the market will stop voting on BlackBerry and start weighing it. And like Groupon, if and when the perception of the market changes, BlackBerry can also climb 200% from current prices, without necessarily becoming a better company or even a profitable company.
But that's where the opportunity is in the long term. Due to this negative perception, the stock is priced where it is today. And if my thesis is correct and perception changes in the future, then long term this stock will appreciate. And like Groupon today, that has a target price of 300% from its lows, BlackBerry might also have a target price 400% from current levels, if and when the stock reaches $30 and everyone all of a sudden is extremely bullish, even if nothing has really changed about the company.
Because just like Groupon, if and when perception changes, the weighing machine factor will kick in and the voting machine factor will go out the window. Come to think about it, does anyone remember what they voted for in the last elections?