You all know the Wall Street saying "buy the rumor sell the news." Well sometimes that also works backwards, "sell the rumor and buy the news." That's more or less what happened to BlackBerry (BBRY) the last couple of trading sessions.
When the company announced its Q3 results for 2013, the first thing I looked at was the balance sheet and the cash position. I had no doubt the cash position would be pretty high. On the one hand I knew the company was not burning much cash and on the other, the recent $1 billion private placement of debentures was the company's insurance policy.
With current assets standing at around $5.8 billion, BlackBerry is still very liquid and solvent by any measure. So the company is not going out of business as many thought or hoped.
So since the company is not going out of business any time soon, the question is, what would justify buying the stock, since the company is still losing money?
I can bring up a number of things, for example, excerpts from the most recent conference call that I thought were very interesting, or the continued success of BBM, or the fact that the company is working on an enterprise version of BBM, or even the Foxconn deal and what it might mean for the company, or a bunch of other issues.
However, I will not bother you today with these issues, I will have more on all this stuff in the future. Instead, I want to focus on something else that many people following BlackBerry have probably missed and has very little to do with BlackBerry itself.
There are two main reasons to buy BlackBerry's stock today:
1) The company is not going out of business
2) The company is in restructuring mode
Both reasons are important, however, the second is probably the most important as far as the current price of the stock. Why you ask? Because the market has been pouring money into turnaround stocks, giving new management the benefit of the doubt, even before we have seen any improvement in these companies.
Let me give you two examples ...
Let's start with Zynga (ZNGA). Remember what happened when the company fired its old management and hired a new CEO?
So far the price of the stock has about doubled. Has the company's revenue and profits increased to justify the increase in the price of the stock? The answer is no. In fact revenue is still falling and the company is still losing money.
Why has Zynga's stock price gone up? Because the market is hoping things will change and the company will produce a profit in the future.
The second stock is Groupon (GRPN). After the board fired its CEO, the stock has since then gone up fourfold. Has the company increased revenues and earnings since then? The answer is no, nothing of the sort. Groupon's stock is up for the same reason that Zynga is up and that is, since these companies are not going out of business, the market is giving them the benefit of the doubt.
Because in all three cases -- BlackBerry, Zynga and Groupon -- the market had discounted the companies assuming they were going out of business, and since that is not the case anymore, on the one hand their stock price is adjusting to a different reality -- that they are not going out of business -- and on the other, management in all three cases has a different plan of action than before, and the market has been buying the plan.
So since BlackBerry is not going out of business (as its balance sheet suggests), the market is free to speculate on its turnaround plan, giving the new management the benefit, until proven otherwise.
As the cases of Zynga and Groupon suggest, the market can be quite generous while in the process of giving the benefit to the stock in a turnaround situation, when there is a change of management.
And if history repeats itself, BlackBerry can very easily double from current levels, for no apparent reason whatsoever, outside of the fact that there is a new management team in place and it has a new plan of action in place.