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A simple and correct economic explanation for why the stock market is so strong, and will strengthen even more in the future, was presented last week on CNBC by Omega Advisors CEO Leon Cooperman. Cooperman is a hedge fund manager with 45 years of experience in financial investing, including as a senior manager at Goldman Sachs. He was also among those who said to buy stocks aggressively when the market was at a bottom in March 2009, for exactly the same reasons that he points to now, when advising investors to buy stocks.

He explains that then, the P/E (price to earnings) ratio for S&P 500 companies was 14. Today, though share prices (P) have doubled, the average multiple remains 14 because the profits (E) have also doubled, on average.

“In a good market or in a bad market, it's better today to be in equities than in bonds, in light of the pricing of both asset classes,” he advises. As far as the risk of sliding into recession because of higher oil prices, he estimates that it would take a price per barrel of over $125 for that to be a danger.

If someone is looking for the reason behind the 16% jump in Magic Software’s (MGIC) share price on huge turnover beginning last Wednesday through Friday, it is that same Cooperman and what he said in the interview referred to above. I believe that investors made a mistake and misunderstood him. When he was asked to list some recommended shares, he quickly gave a long list of stocks, such as Apple (AAPL), Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA), Vodafone (VOD), and many others, each with a market cap of at least $1.5 billion, and mixed in was the name MGIC. The share soared, however, it turns out that (upon verification by CNBC) he was referring to mortgage insurer MGIC (MGIC Investment Corporation), and viewers mistakenly thought he was talking about the ticker for the little Israeli company Magic.

On Friday, shares in Blackberry manufacturer Research in Motion (RIMM) crashed 11% in response to results, despite the fact that the company continues to grow strongly. The earnings per share in the year that ended in February was $6.34, compared with $4.37 the year before - growth of 45% - and the share trades today at a P/E ratio of 9. The collapse came because guidance for the quarter ending in May was considerably below forecasts. But the real reason is the market’s view that apparently, like Nokia (NOK) before it, RIM is about to enter the trauma room due to the nearly impossible competition with the successful Apple, and it is not clear when and how RIM will get out.

The company has lost so much of investors’ confidence that for the first time I see the phenomenon that all the analysts, including those who have a “Buy” rating on the stock, are chuckling at the guidance that the company issued with its results for profit of $7.50 per share this year.

If the company meets that guidance, it means that the share is trading today at an earnings multiple of around 7 for a smartphone company. To me, it seems much too simplistic on the part of those analysts who erred so greatly with their positive recommendations on Nokia in its first two years of competition against Apple. Now, in my opinion, they are making a mistake again by moving the troubles at Nokia and the mistakes of its previous management directly to RIM.

Blackberry devices, which until the arrival of the iPhones were the default option for businesspeople in North America and Europe, today are actually a favorite in emerging markets - 52% of sales in the most recent quarter, compared with 36% in the corresponding quarter. It turns out that among other things, the unique message platform on the Blackberry, in addition to its physical keypad, made it into a hit in many emerging markets, primarily South America, where subscribers go crazy with intensive SMS communication, in lieu of expensive voice conversations.

Analysts view the turnabout in the geographic diversification of sales of RIM toward Asia and South America as a negative, because the gross profit on the cheap devices sold in those countries is low. But growth in those countries is considerably higher than developed countries, and so the quality of life is expected to improve considerably. That is, the world's baby boomers are coming from China, India, and Brazil. So I actually think that RIM will benefit from selling more expensive smartphones to those "captive" customers in those same countries in the coming years, which will lead to a significant improvement in its future results.

I am taking advantage of the cash in my portfolio tracked at "Globes" and adding RIM, at a time when negative sentiment about it is breaking records. In my opinion the company will turn around ahead of the release of its first tablet computer-- the PlayBook-- next month, and when its new smartphones arrive in the summer.

Published by Globes [online], Israel business news - www.globes-online.com - on March 29, 2011 Reprinted on Seeking Alpha with permission

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Source: Research In Motion: Why I Disagree With the Analysts