Market Reaction: The RIM Lesson

How the market reacts to news can be very revealing. Twenty years ago, when a stock halted trading I was often asked by our trading team where it would reopen. The problem is understanding the framework of the analysts following the stock and the overall market environment. The same news can have a widely differing impact based upon the market circumstances. I have occasionally worked as an expert witness on matters relating to news. The key is to look at comparable companies and determine the market background.

The modern era is different. Every commentary reflects knowledge of where the stock is trading after hours.

The Research in Motion Example

Research in Motion (RIMM) announced earnings that beat the official Street expectations by 3 cents (3%). The revenues were about $90 million light (2% or so). Gross margins were solid at 44.1%. New handset growth was 5% short of expectations. The outlook was in line with expectations.

In a neutral market environment the stock might be down 3-4%, but the current market is not neutral. In after-hours trading the stock is down 12%, and tomorrow's reports and commentary will reflect this market reaction.

The Investment Lesson

The macro view. The market is "teed up" for a focus on revenue. The bearish argument has been that corporations achieved good earnings last quarter through cost cutting. We understand and accept this behavior. Companies cut back on costs and employment. They will hire slowly and reluctantly. They are lean and mean. If the economy continues to improve, revenues will grow and earnings will grow faster. Slow hiring, wise for an individual company, undermines the need for the economy to add employment. It will be a mixed picture for many months.

In addition, many are looking for a reason to sell after a big rally. Dow 10,000, while meaningless to professionals, has a psychological impact. Technicians see S&P 1050, which will be challenged today, as a key support point.

Briefly put, the market will be unforgiving when companies miss on revenues. It will be doubly so when the company does not provide a bullish outlook. Few can be expected to do so in a time of economic uncertainty. Many companies are not even providing guidance.

It is a clear choice for investors in this stock and others:

If you see a depression as "off the table" and a period of reasonable growth, revenues and great earnings will follow.

Those who hate government data and prefer specific company reports and anecdotal information (the Power Lunch economic index comes to mind) will find plenty to worry about. We highlighted this in April in our article, Jim Abbott and the Wall of Worry. Our viewpoint, now proven to be correct, was met with plenty of skepticism. The worries continue.

It would be naive to expect the market to move in a straight line. That is too easy.

The RIMM viewpoint. We own RIMM in our own account and those of many clients. We have been looking to add a good growth stock for more recent clients, and will add RIMM in the coming days. Despite yesterday's report, the prospects are very good. Jordan Kahn at RealMoney (subscription required) sees earnings of $5 next year and a target of $100 in a year or so. Every portfolio should have a growth component, and this is a great candidate.

Since we are aware of possible market share loss to Apple (APPL), our clients also own that stock. We expect both companies to benefit from the growing mobile Internet market.

Final Take

We expect to see this story repeated many times during the earnings season. There have been few negative pre-announcements, but companies use earnings as the trigger for those statements. There will be revenue misses.

Comments

[coldcall:]

The market always over-reacts and good thing to because then it presentats buying opportunities.

I will be loading up on RIMM once the red stops. There is no way that on the results and forward guidance announced yesterday, the business is worth 10-15% less than it was before the results were announced.

I'm thinking there must have been alot of stop losses which automatically transacted when the sell-off occured afterhours yesterday.

Sep 25 07:41 AM

[Hayweed:]

Check page 8 of the Conference Call Transcript where Basille in response to a question from Gus Papageorgiou - Scotia Capital talks about devices containing all kinds of features and "how do you sort of harvest all that richness together?" Then he as usual rambles on while saying nothing then mentions apps but states he has something big coming but can't talk about it.

Clearly this ramble shows that Rimm has realized that the iPhone is the converged device and that Rimm needs to have all the same features. Also you need to provide a great consumer experience and that is all about apps, which is not Rimm's strong suit.

Problem Rimm is having is that 80% of new customers are consumers which is not Rimm's strong area. Here Rimm is like a fish out of water but the fact that Verizon has such a lame phone lineup means Rimm gets pushed and pushed hard by the non-iPhone selling carriers. With all the new android phones coming it will be interesting to see if Rimm can keep the consumer interested in their phones when the phones are really business focused. Slapping an mp3 player, a video player and a facebook app in a phone does not make it a consumer device. If it did then why do you see so many blackberry users carrying ipods on planes.

Sep 25 07:50 AM

[Roger Knights:]

There's a devastating InfoWorld review of RIMM's Blackberry, at www.infoworld.com/d/mo...

"Deathmatch: BlackBerry versus iPhone: It’s time for us to bury the BlackBerry and move on to modern mobile -- even for e-mail

"By Galen Gruman / InfoWorld / MAY 26, 2009"

It concludes, "For everyone else, the BlackBerry is yesterday's mobile messenger, way past its prime and heading toward retirement. The iPhone is light-years ahead of the BlackBerry on almost every count."

Sep 25 09:16 AM

[Frank Castle:]

Funny .. you should read more up to date articles by Galen who seems quite dismayed by iPhone and that he can now understand why no enterprise wants anything to do with iPhone support.

Two major players serving vastly different verticals. RIM has an easier job going after consumers vs. enterprise. Giving up control is not Apple's strong suit.

Sep 25 10:18 AM

[inthemoney:]

> There is no way that on the results and forward guidance announced yesterday, the business is worth 10-15% less than it was before the results were announced.

May be you should ask yourself whether it wa sworth whatever it was trading before the earings announcement?

Sep 25 10:48 AM

[Gerry Sullivan:]

Going back to June 2008, RIMM has now had 3 instances of opening with a gap down. In the 2 previous instances the stock continued to decline. RIMM is a trading stock, not a long term holding.

The comment about Verizon is correct. The stores don't have anything exciting at all. Just RIMM phones and they are cutting prices on those, like buy one, get one free. No Google, no IPhone, no Palm Pre.

Maybe we have reached a point where there just isn't anything exciting in phones. The IPhone is now $100 and there are lots of
complaints about the AT&T network. Palm and Google have interesting phones, but Sprint and T-Mobile aren't the best networks.

I am long RIMM and plan to hold it for now. Next time everyone on Fast Money loves it, I am going to sell it.

Sep 27 09:45 AM

[Roger Knights:]

"you should read more up to date articles by Galen who seems quite dismayed by iPhone and that he can now understand why no enterprise wants anything to do with iPhone support."

That's an overstatement. I just read Galen's Sept. 15 article in Infoworld. A slipstreamed fix in OS 3.1 for the iPhone 3G made it unacceptable to Exchange 2007 servers that required on-device hardware encryption. The iPhone 3GS is unaffected, as are other Exchange servers. Galen is dismayed by Apple's non-forthrightness about this, primarily, and what it says about the company. Apart from this, he hasn't recanted his evaluation of the merits of the iPhone vs. the Blackberry, as your words imply.

Oct 03 02:53 AM