Research In Motion's Attractive Future

Nov.23.11 | About: BlackBerry Ltd. (BBRY)

Everyone’s ideal investment or trade is to pick an asset at its price bottom (or top depending on what side of the trade you’re on) and make your investment. Of course that is an incredibly difficult thing to actually accomplish in the real world with fluid markets and new price discovery occurring every second. Thus the perplexing question of “where is the bottom?” (or top) is never really solved until it is too late. However, it is not so difficult to determine some sort of a range for how low the price will fall given the fundamentals do not change too drastically. This allows you to define the level of risk you are willing to take on and helps traders and investors to control how much capital can be lost in a single position.

I think I found a solid, fair, and decent price in a company that I have shorted for years. I have always felt Research In Motion (RIMM) was a company with many ailments. Management is atrocious, innovation is borderline non-existent (matter of opinion), and growth has slowed in a significant number of key areas. RIMM has been plagued by product launch delays, bringing a tablet to market that nobody really wants, and recently even technical issues. Despite all of these ailments and symptoms in RIMM it falls into a unique category I keep track of. Every investment has a price where the reward-to-risk ratio becomes so insanely high that sometimes it is worth it to take small calculated investments.

Now let me firmly state that at a current price of around $17 I don’t find RIMM attractive, yet. As I have watched this stock price collapse (mostly to my amusement and profits) I began thinking in a new direction. That direction is solvency. RIMM has no debt to speak of. That is one of the best parts about this potential investment; the risk of solvency is completely off the table! Even though revenue has tapered off a bit in recent quarters and I think it will continue to decline quite a bit, RIMM has some intrinsic value. An easy way to get an idea of that intrinsic value is the Price-to-Book ratio. Since RIMM isn’t a financial services firm we don’t need to worry about “fake” book values and “skewed” tangible book values. RIMM is sporting a P/B ratio of less than 1. The current Price is less than 3.5X the earnings per share as well. Even if earnings were cut in half and the new P/E was brought up to 7 RIMM is still incredibly cheap.

RIMM is finally reaching an attractive price. I think if I can pick up RIMM for around $14-$15 a share it is a great long-term play. The company isn’t going to dissipate into thin air over the next few years so I don’t have to worry about the price being $0 when I wake up one morning. My greatest fear for RIMM is that it continues to lack innovation. I think the stock in the long run easily deserves $20-$25 a share based on current EPS.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.