Seeking Alpha
Long/short equity, contrarian, special situations, wild cards
Profile| Send Message|
( followers)  

It all happened so quick, and I can't remember much.

This morning, I woke up and started to have flashbacks - I remember seeing 52 week lows, I remember seeing $8.4 billion in shareholder equity. I remember seeing a market cap of $3 billion. The details were fuzzy, but after a second coffee, I pieced it together and couldn't believe it. I had a small long position in BlackBerry (NASDAQ:BBRY).

I've never really been a BlackBerry bull, all the way from its heyday in the $100+ region (when I was your age, BlackBerry was called Research in Motion - and Pluto was a planet!), down to its unceremonious last couple of years under Thorsten Heins.

And then, there's an article I wrote just 12 days ago, entitled "Don't Bet on BlackBerry's Last Stand". I had to go back and read it myself this morning, I can't believe the me of 12 days ago didn't have a voice in the argument to buy, made by the me of yesterday. Half excited, half dumbfounded, like a drunk who knew he had a great time the night before but couldn't remember the details, I opened up my brokerage account today and checked things out.

It seemed like everything the company was doing lately was simply just not working. They botched the launch of the BlackBerry 10 badly, setting into motion an ugly chain of events that has found BlackBerry, again, down 42% in the last three months, 49% on the year, and 84.8% in the last five years.


(Click to enlarge)

Fairfax's (OTCQB:FRFHF) deal to buy the company (which was really just a placeholder deal we know now) fell apart at $9. Ideas for breaking the company up and selling it piece by piece (advocated by a lot of BlackBerry longs as the prudent solution) fell through also.

After temporarily backing the BlackBerry buyout, it took me roughly 15 minutes of due diligence to conclude that something stunk and that the buyout was likely not going to go through.

Then, it was talks about the Z30 phablet being the saving grace for the company. That, I argued, was more nonsense.

It was announced earlier this month that BlackBerry had dethroned Thorsten Heins in conjunction with making a hard left from the potential Fairfax led buyout. It then came out and said that Fairfax was, instead, going to be part of a consortium of investors that were going to invest $1 billion in the company through convertibles.

So, in essence, BlackBerry has taken one last shot with $1 billion in convertible debt financing.

While trying to figure out how I had ultimately convinced myself to stake a speculative long position in BlackBerry, I started to mull over the reasoning in my head again this morning. The fact is that there actually is a small case to be made for staking a long position in BlackBerry right now. Is it risky? Absolutely. Is the company definitely down? Yes. Is the company out? No.

So, bear with me here for a second.

Valuation

Let's start with some fundamentals.

Kofi Bofah lays out some of the fundamentals in his article "BlackBerry Shareholders Got Flooded". I'm going to use the same fundamentals to argue a different point:

BlackBerry did finish up its latest second quarter of fiscal 2014 with $12.5 billion in assets above $4.1 billion in liabilities on the balance sheet. BlackBerry operated with $8.4 billion worth of shareholder equity, as of August 31, 2013. Over the past two quarters, the BlackBerry asset base has declined by $657 million. Of this amount, the BlackBerry cash reserve position lost $368 million, after the company netted $13 million upon short-term investment trading the prior six months.

Currently, BlackBerry is priced at a $3.1 billion market cap, despite having $12.5 billion in assets and about $8.4 billion in liabilities on its balance sheet.

To do a back of the napkin book valuation - with 514 million outstanding shares (according to Yahoo! Finance) and $8.4 billion in shareholder's equity, the company is technically worth $16/share on paper. I also realize that the value of those particular assets on paper is probably not what they could be liquidated for - but, still, half of that valuation would still be a 25% increase from the current market price.

But, the cash flow is what's important, right? Alright, so the company is bleeding cash - but if this new team can start to cut that sieve off a bit, BlackBerry actually has some feet to stand on. The company is far from lopsided from a balance sheet perspective - for now, at least.

With the stock trading at its lows around $6, it doesn't seem like the worst value buy right now. Speculative, maybe, but definitely nowhere near overpriced.

Fun with Charting

In addition, check out all of these crazy colorful lines!


(Click to enlarge)

But, seriously, what I'm trying to point out is that from a technical standpoint is that there's some support at $6. Whether the stock loses $6 or breaks upwards from it is likely going to be foreshadowing into the future direction of the stock. Is $6 going to be the line in the sand and entice buyers, like it seduced me? The next couple of trading days will likely tell this tale.

In addition, the RSI indicates that BlackBerry has been significantly oversold on this last dip from $7 to $6. When a company is in dire straits like BlackBerry is, the RSI isn't the only indicator you'd want to go by, but it certainly helps as supplemental information.

Money in the Bank, Gas in the Tank

Additionally, the company now has some cash to do its business with. With bringing on its new executive team and having a pile of money to sit on, a lot is going to hinge on what the "new" strategy is going to be.

And to be brutally honest, any strategy delivered at this point with some confidence and resolve is going to incite a small rally with BlackBerry longs. At this juncture, people are just waiting to hear what the plan is, so that they can get behind it and continue to cheerlead.

Layoffs are ugly and not fun, but are a fact of life for companies that need to secure their cash stash and stop the bleeding. BlackBerry has a plan to help get its fundamentals in order, and is executing it, according to IT World Canada:

BlackBerry Ltd. yesterday said it is preparing to lay off 250 workers at its Waterloo, Ont. headquarters as it continues restructuring with a new executive chairman and the infusion of a $1 billion cash injection from investors.

The smart phone maker said in a statement that it is in a transition period and that the latest job cuts are part of a larger retrenchment program that will eventually see 4,500 people losing their positions. The elimination of at least 40 per cent of BlackBerry's current workforce is part of its move to cut cost and refocus its business.

While it's not a corporate strategy for the company to move forward by any means, it's at least a nod that the company is starting to batten down the hatches and secure its fundamentals any way it can.

Short Squeeze Not Totally Out of the Picture

In addition, it's reported that as of the end of October 2013, there were 149 million shares held short - nearly 30% of the entire float. Additionally, by looking at the options action (where puts outweigh calls significantly), you'd see that there's a lot of money stacked against BlackBerry. Generally not a good sign, I admit.

But, sometimes it's good to follow these crowds - and sometimes, the bigger the short crowd is, the harder they fall.

While it's getting harder and harder to come up with events that could trigger a BlackBerry short squeeze, there always remains the possibility with any company whose short position has significantly compressed the stock price - like in the case of BlackBerry.

Risk & Conclusion

Aside from the risk of the company not making it, which remains the biggest risk - there's still other items that need to be considered.

Aside from having the cash in the bank, the convertibles are likely to either be shorted against or downright sold in order to ensure Fairfax's debt position - even if they are "BlackBerry's biggest fans".

This is not a position you would take and then not keep a close eye on going forward. This is the type of position that you'd stake in a company but have to be absolutely insanely diligent about keeping tabs on - which I plan to do.

There have been companies that have been in BlackBerry's situation, where everything has looked absolutely horrible, that have gone on to prosper. Companies like Sirius, Apple and Priceline all saw days where it appeared the end was near - and they all pulled themselves out of the muck.

A blackjack dealer in Vegas once told me, "you can't win what you don't put in". Though it's hardly an investment strategy to live by any of the time, it's a reminder that you do have to expose yourself to risk occasionally if you're looking to aggressively make money. And, a reminder, a long position in BlackBerry definitely comes with significant risk.

The question of whether BlackBerry can be the next company to provide that return remains to be seen, but for me, the speculative risky bet could yield massive gains, so I took a stake. With the equity in place, money in the bank, and a new team to give it a new shot, BlackBerry has taken the place of my speculative investment in my portfolio.

Best of luck to all investors.

Source: God Help Me, I Woke Up With A Long Position In BlackBerry