BlackBerry: Hold Your Nose And Buy?

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 |  About: BlackBerry Ltd. (BBRY)
by: Ashraf Eassa

Early on, I learned that taking a contrarian position in the markets can be extremely lucrative -- that is, if you time it correctly. All too often people try to "catch a falling knife" in the hopes of hitting it big. Some get lucky and catch such deeply hated stocks right at the bottom before sentiment completely reverses, but often times it's a long, and seemingly excruciating, wait to simply get back to even, let alone make the huge profits dreamed of when taking said contrarian position. However, there are some useful signs that investors can use to determine whether it's time to "hold your nose and buy," and I think that BlackBerry (NASDAQ:BBRY) might finally be exhibiting them.

Balance Sheet Clean As A Whistle, Trading Significantly Below Book Value

If there's one thing that can be said about BlackBerry, it's that its balance sheet is as clean as a whistle. With $5.48/share in cash, the business is valued at a mere $3.44/share. While the quoted book value of just north of $18 might be a bit of a stretch in trying to estimate what investors could actually get from a liquidation sale, I do believe that the business itself -- despite the fact that it's in deep trouble -- is probably worth more than $3.44. In fact, at 1.33x EV/EBITDA, it could even be argued that the shares are just downright cheap.

While as a friend of mine continues to remind me, cheap isn't a catalyst, it certainly serves to cushion your downside if your thesis turns out to be completely wrong. This is probably the most important thing to look at if you're trying to speculate on a turnaround - having a pretty solid floor on where the stock could go in the near/intermediate term.

Worst case? The stock drops right down to cash value at $5.48/share, and you lose 40%. Now, the great thing is, the information that I'm relaying here isn't exactly a secret, so the stock will likely see a flurry of "deep value" buyers long before the shares get to that "horrifying" $5.48/share level. I'm not saying there's no downside, but the downside does seem to be fairly minimal at the sub $9 level.

Ripe For M&A Speculation

I personally think that BlackBerry is eventually going to be harvested for any patents/IP that it has. This doesn't call for upside to, say, $30, but anybody buying at the $9 level could -- in the event of such a buyout -- make a pretty penny. But more importantly is that mere speculation about such a take-over (or some kind of merger) could be enough to drive ~20-30% upside from here driven by a short covering spree. Now, unfortunately, a lot of the time this speculation turns out to be bogus (as I warned when the rumor that Lenovo (OTCPK:LNVGY) was interested in BlackBerry hit), so it is usually best to take some (if not all) of your gains off the table. More often than not, a huge sell-off usually follows the initial enthusiasm.

It's Really, Really Hated

The sell-side really set the bar super high for this particular stock ahead of the last earnings report. I mean, who can blame them? The stock was, for a while, probably the most interesting "battleground" stock on the market, and I have no doubt that the exuberance generated a good chunk of commissions for the brokerage houses. However, the problem with a potential turnaround wonder story is that if it flops, it becomes extremely hated.

But hatred can also be used to the contrarian speculator's advantage. One whiff of good news and sentiment will begin to turn. Suddenly there will be hope again that the turnaround is on track. Maybe it's a new product launch, or perhaps a good quarter. But the point is, the risk is now to the upside.

Conclusion

So you have a hated tech stock with plenty of cash, no debt, and one that has been hit pretty hard following an earnings report that didn't deliver to heightened expectations (upon which the previous $13-$14 price was based). While I still think BlackBerry's business is still in trouble (as the last quarter's dismal results showed), the stock is looking more and more like a coiled spring each day. While this isn't a name for more conservative, blue chip investors to sink their net worth into, it's an interesting speculative play that could pay off nicely... if you're willing to accept that this really is a speculative play, and not an investment-grade blue chip.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.