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As somebody who covers about 70 equities, I've found that there's enormous pressure to be "right" all of the time. The truth is that this isn't possible since absolutely every short- or long-term thesis has upside and downside risk. The key to being a successful investor is to identify opportunities that have very good risk/reward opportunities, and to over a reasonable period of time have more winning calls than losing calls.

With a stock like BlackBerry (NASDAQ:BBRY), many readers have astutely noted that I very often "switch" which side of the trade I'd like to be on. There are stocks that are simply "buy and hold forever", and others where the trick to making money is to identify when the risk/reward profile becomes very skewed in one direction or another. I have always seen BlackBerry as a "catalyst" driven stock, and my writings reflect this.

The last time I wrote about BlackBerry was in my August 4th note, BlackBerry: Hold Your Nose And Buy?, in which I made the following observation,

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.

Well, with BlackBerry announcing that it could be looking into "strategic alternatives", it looks as though the short term thesis got exactly the catalyst that it needed. Shares are up 16% from the article's publication as of the most recent close, and were up about 32% at the peak of the strategic alternatives mania.

What Now?

We're in a weird situation where I don't think there's a whole lot of downside from current levels, but at the same time I'm not sure if there's much in the way of upside, either. I tend to agree with the sell-siders who claim that BlackBerry's handset division is largely worthless. The problem is that I don't really see any of the Android handset players wanting to get involved with BlackBerry, so the list of possibilities is really whittled down to private equity (i.e. something orchestrated by Prem Watsa) just buying the whole thing and trying to re-organize it into a company that generates a healthy amount of FCF.

Of course, private equity isn't a synonym for magic. The underlying business really is in rough shape, as the BlackBerry 10 handset/ecosystem is unlikely to do much to stem the broad secular shift towards Google (NASDAQ:GOOG) Android based devices as well as Apple's (NASDAQ:AAPL) iPhones. To add salt to the would, it was recently uncovered that the vast majority of the apps for the BlackBerry 10 platform were made by a single developer, and have little to no utility. This goes a long way to showing that without financial might (or a free OS that every handset maker uses), introducing a new consumer operating system is just extremely difficult.

At this point, BlackBerry's only real assets are the cash on its books, its patent portfolio, and its enterprise services. While the company currently trades at an EV of $2.59B and generates ~$1.32B in EBITDA (suggesting a ~1.97x EV/EBITDA multiple), the problem here is that looking at TTM EBITDA is highly misleading. The business is clearly in a rapid decline, and we are now at the point where management has stopped issuing guidance. I don't know about you, but that kind of uncertainty makes is very difficult to estimate free cash flows over any reasonable period of time, which makes it less likely that private equity would suddenly be willing to pay a meaningful premium over the current EV.

So, what do investors do? Well, I am personally sitting on the sidelines on this one after that run, but if I had to choose, however, I'd probably be long as the problems are largely known, but any potential upside "surprises" could still be good for another 15-20% upside. There is a substantial short interest still in the name, so the slightest hints of hope could still probably lead to outsized near-term upside reactions - but I'm not confident enough to bet either way at this point.

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.