Readers that follow me know, that I take controversial opinions when it comes to my investments and I do not shy away from laying out my contrarian investment thesis. Many of the distressed equity investments that I cover are only suitable for hardened contrarians. Many of the investments also display high short-term volatility and the economic prospects of those companies is everything but certain.
As a distressed securities investors I am specifically looking for companies that go through a hard time and I am predominantly occupied with sniffing out value in special situations (recaps, restructurings, spin-offs) that other investors are too afraid to touch. I believe that that's where the real value is and where real returns are hidden. Also, I do not believe I add a lot of value to readers if I recommend stocks that everybody else also recommends and buys.
The nature of contrarian investing includes exposure to an extraordinary amount of opposition and negativity. If you don't believe me, all you have to do is go through the comment section of my BlackBerry (NASDAQ:BBRY) or, better yet, J.C. Penney (NYSE:JCP) articles and you will see the unenlightening amount of negativity, doubt and disbelief inherent in those comments. Warren Buffett said, that investors "should be greedy when others are fearful and fearful when others are greedy". This investing wisdom implies, that investing is the most lucrative when other investors don't want to buy stocks at all, and, preferably panic (namely, at the time the economy experiences a recession). The same holds true in the case of special situations. Too often investors underestimate the profound impact of psychological factors on the price setting mechanism. Anybody taking investing seriously will know, that the overwhelming majority of retail investors buys around the peak and sells around the bottom. Psychology, in particular group psychology, or herding, has a fundamental impact on the price of a security that cannot be neglected.
On February 9, 2014 I have written the article "BlackBerry: We are right and Wall Street is wrong" in which I pointed out the underlying behavioral biases that affect investment decision making and why Wall Street actually follows a self-serving agenda: Wall Street is a system, that, like all systems, is primarily concerned with keeping itself alive and it has no real interest in giving you valuable investment advice. In the article mentioned above I wrote:
One of the key challenges when it comes to investing is reflected by Wall Street analysts and their portrayed herding behavior. Analysts bounce their ideas back and forth with other analysts and are mostly surrounded by individuals who work and think with one goal in mind: To stimulate investors to act, to trade, to sell, to engage in transactions.
They usually know their industry and the businesses in it, but they are surprisingly poor in forecasting inflection points. Consequently, their target prices for stocks are continually revised upward in bull markets and continually revised downward in bear markets. Investors, listening to mainstream Wall Street analysts, are unlikely to get good investment advice. The bottom line is: Investors should not want to be part of the herd and constantly trade in and out of positions which benefits the broker and rarely the investor.
I have referenced the paragraph above before, but it is worth repeating. Investors still are way too dependent on the sell-side assuming that they have the magic crystal ball. In reality, quite the opposite is true: Wall Street analysts are usually following the stock price with their recommendations -- in both Bull and Bear markets. Investors really shouldn't care about what sell side analysts at Wall Street houses recommend and, instead, think for themselves.
Analysts and market gurus rarely get it right
In the case of BlackBerry, two Wall Street establishments recently reevaluated their ratings on BlackBerry after the company presented fourth quarter results. Credit Suisse downgraded BlackBerry to 'Underperform' after the company presented a sizable earnings beat and sliding revenues. The current price target, according to Credit Suisse, is $6.00. At the same time, Evercore Partners downgraded BlackBerry to 'Underweight'. The Street itself ranks BlackBerry a 'Sell' and Jim Cramer has been quite pessimistic on the stock as well (check out his video statement from December 2013 about the smartphone company here).
My favorite contrarian indicator of all time, however, must be Jim Cramer. Jim Cramer is a TV personality running the CNBC hit show "Mad Money". Indeed, somebody must be mad to be following his advice. Jim Cramer represents everything that's wrong with today's investment business: No analysis, no critical thinking, just momentum driven trading in order to present the viewer with a few hot stock tips. I have repeatedly said that investors are likely to do much better by adopting a long-term mindset that allows them to make better investment decisions. Not needing to trade carries an immense amount of power.
I often take some heat with respect to my contrarian investments like BlackBerry. Much of it comes in one of these two forms: 1. How can BlackBerry be a good investment after sales just plunged 64% y-o-y? 2. Why am I so sure that BlackBerry is a good investment right now, after all the stock has been in decline for so long?
The answers to those questions are actually as simple as they are straightforward: 1. Just because I am buying BlackBerry shares doesn't mean I don't acknowledge the existing fundamental problems at hand. However, I purchase BlackBerry at a material discount to intrinsic value. A discount so large, that, I believe I get a great deal despite the revenue challenges BlackBerry faces in its hardware division. If you question my conviction about material discounts to intrinsic value as a key value driver, head over SA's chart section and check out the Bank of America (NYSE:BAC) chart in 2012 to see what a turnaround can look like. Bank of America was trading at extremely depressed prices back then as well.
I believe BlackBerry still has an intrinsic value of $17 per share which equates to a current discount of 52%. In other words, I think BlackBerry is a solid Fifty Cent Dollar and I am confident with the amount of risk I am taking. The smartphone company has much more potential to surprise to the upside than it has potential to disappoint. What this means is, expectations have been driven so low already, that BlackBerry will find it easier to surprise to the upside in coming quarters.
As to point 2: I am a distressed securities investor for over ten years and I buy long-term turnarounds - I don't care too much about quarterly sales results or a "pop" because of an analyst recommendation. I am in with both feet to ride the full recovery. I have seen for many years and on many occasions how turnarounds develop slowly with a good amount of setbacks on the way. Many of those setbacks are exploited to spread a Bear thesis. Turnarounds usually progress in stages: At first, nobody believes in a turnaround. As the company in question begins to deliver results and progress is made slowly and the restructuring begins to gain traction, more and more investors get on board. It is time to sell the turnaround/special situation when everybody loves the stock once again (that is, Jim Cramer recommends it). Or, as Ghandi said: "First they ignore you, then they laugh at you, then they fight you, then you win".
Most battles are fought in people's heads only and, unfortunately, there are not many investors out there who have a truly open mind, make an effort to overcome their own biases and display the courage to be visionary.
After careful reconsideration of my investment thesis, I have concluded that BlackBerry remains an outstanding contrarian investment for investors who dare to think independently and don't give a damn about Wall Street analysts who pursue their own agenda anyway. I am also reaffirming the fundamental views shared by my fellow SA contributor Quoth the Raven with respect to BlackBerry. In his latest article he pointed out the importance of sentiment as a contrarian indicator and I wholeheartedly agree.
BlackBerry continues to exhibit a high quality balance sheet with a strong cash position which limits downside risk significantly. Investors who don't give in to negativity and believe the company has a solid technology platform to build its business on, are looking at a potential multibagger. As I have said before, the time to buy is when nobody wants to. Just ask Warren Buffett.
Disclosure: I am long BBRY, JCP, BAC. 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.