What I Learned From Shorting RIM

Dec.27.11 | About: BlackBerry Ltd. (BBRY)

Do you dislike history classes and find lessons gleaned from the past useless? If so, please move on as I know your time is valuable. You won't get stock tips here. You may, however, find tidbits that may help you protect your equity in the near future.

After releasing disappointing earnings, a dreary outlook and further delays in the release of their next generation phones, RIMM closed at $12.52 EOD. It then gapped to $14.14 due to news that AMZN, NOK, and MSFT were interested in buying it sometime ago. Not surprisingly, nothing happened.

7:18 AM Shares of Research In Motion (RIMM) trade 10.7% higher in premarket action after reports crop up that big players such as Microsoft, Nokia, and Amazon were flirting with buying the embattled company over the last several months.

There has never been a stock that seemed to serve as such a fantastic lightning rod for both bulls and bears alike than RIMM. If the perception of arrogance is the byproduct of sharing the Ugly Truth, I'd take that as a compliment. In the end, it is all about making money in the market; to be able to help someone else do it is an added bonus.

This article wasn't written to slam RIMM or talk it down for my own gain (it may sound like it if you are a RIMM fan); it has done that admirably without my help. As 2011 is ending and RIMM has hit lows not seen since 2004, I thought it was time to "close the book" on my short thesis, i.e. which assumptions worked and which ones failed. I've always stated my purpose in writing from the beginning; I am humbled that I have also learned a lot from my readers. For that, thank you.

A bit of a perspective would be helpful...

  • My first RIMM article "RIMM - another tipping point?" (an Instablog) was published on July 7, 2011. This provided the crude framework of my thinking.

What I'm interested in is on whether or not one can use publicly aired dirty laundry (and how the targeted companies react to them) to trade profitably.

It also isn't about comparing the Blackberry to the iPhone or an Android. I believe there are more than enough astute bloggers in SA that have passionately argued both positions (long or short).

If the general employee sentiment is really as bad as the letters seem to suggest, RIMM will slowly erode over time. At the time of writing, it is at $27.72; market willing, it should attract bottom fishers salivating over its fundamental ratios. For those who aren't short...any bounce up (say in the $31ish) would provide an entry point for a ride down.

  • The second article - "QNX: Today's version of the Emperor's new clothes" was published on Aug 4, 2011. RIMM was at $25 then; the prevailing "buzzwords" then was that it was "trading close to book value". Initial results showed that Playbook didn't sell well and QNX was being touted to be the "saving" grace. In my humble opinion, to roll a new code out (let alone integrate the new entity) takes more than a year. A reader once likened QNX to a coracle.
  • The third installment - "RIMM: Nothing can save this ugly mess" was published on September 19, 2011 after they reported Q2; I warned that it wasn't going to get any better. A break below $21.60 was another short opportunity; the stock was deemed to have a book value then at $22.
  • The fourth installment - "The Beginning of the End of the Blackberry Messenger" was published on October 14, 2011. With the release of iMessage, I argued that RIMM's BBM will now be disrupted. RIMM was at $23.98 and there was an opportunity for a good short entry due to talks about Jaguar Financial raising a stink. RIMM also suffered a 3 day outage; the ramifications were downplayed - resulting to the company to eventually reserve $50M to deal with the fiasco. I warned that based on previous observations, the earnings release on Dec 15th wouldn't be pretty.
  • The fifth (when RIMM was at $16.77) and last installment ("Open letter to..."). RIMM, after guiding lower, drops another bombshell that they will not meet guidance. BB10, as we learned after, has now been pushed out to the latter part of 2012.

What lessons did I learn from my own journey shorting RIMM that may help those who chose to invest 15 minutes of their time and have an open mind?

  1. The concept of "book value", when it comes to tech stocks, is a dangerous concept to mitigate against catching a falling knife. While I am not an accountant by trade, I was not convinced this argument would hold water because of the following observations: (a) Calculating book value requires linear assumptions, (b) assumptions are subjective, (c) DCF valuation is a moving target, and (d) book value may continue to slide lower should results not hold up to expectations.
  2. The concept of "having no debt", lots of cash, existing clients, having "x" market share, and respectable technology will not prevent the stock price from imploding when sentiment turns.
  3. Marriage is the closest thing in mind when it comes to the concept of "to love and to hold"; one cannot fall in love with the stock or the gadgets that the company produces (or the CEO's silver tongue). Just like in marriage, when it is not working after all the honest effort you've put in, letting go may be the most prudent and smartest choice you may ever make.
  4. Sometimes, in a blink of the moment, your "gut" feel in reading an event can prove to be the most profitable. When these "blink" moments are then supported by facts over time, the results can be fantastic. As these moments are not "measurable"; it cannot be quantified. It follows then (according to conventional wisdom) that if it cannot be quantified, it cannot be repeated. If it cannot be repeated, it cannot be therefore valid. The contrarian in me believes that, as individual investors, this provides us an advantage over blindly following analysts' recommendations (who are now tripping over themselves with other than a "buy" rating).
  5. The Ugly Truth will ultimately rear its head (sometimes can be perceived as arrogance). It is rare to find someone who would take a truthful (supported by facts) criticism and change for the better. To "hope" that management will get it "one day" is not a sound investment strategy.
  6. Snakes do wear suits. Time and time again, we see ourselves being seduced by corporate speak and the "leaders" that seem to do a great job at eroding shareholder wealth. Why is that? Is being smart a requirement to be a billionaire or is it a function of circumstance, or a mix of both? Ironically, these snakes will almost always continue to lead comfortable lives. The game resets with different faces and the story will be the same.
  7. In the end, it is YOUR money. It is human nature to have affinity towards articles or like minded individuals that share your trading position; it is more difficult to have a discussion or read an article done by someone who doesn't. It pays to be attentive and open to dissenting opinions; it provides a great reality check.
  8. Do not underestimate your own background (assuming you are good at what you do); your own experience in your own field can prove to be more valuable than any analyst with an MBA or CFA or any newshead who does not have any "skin" in the game.
  9. Generally speaking, the "market" does not care if you are "right"; the stock may still go down (if you are long) or go up (if you are short). In my humble opinion, what matters most is your trade plan based on your thesis.
  10. Insider ownership and big fund managers' purchases, when assessed in isolation, does not mean it is a good buy for you too. One has to remember that these guys have the staying power to wither losses that an individual investor may not have.

Remember that friend of mine that didn't want to sell RIMM and ultimately did only to put it in LNKD? He is my ex's dad; I'll let your imagination run wild on how conversations around RIMM and AAPL may have turned out.

It is easier to write when it is from the heart and you've got "skin" in the game. He hasn't thanked me since nor do I expect that he ever will. I do know, however, that the Ugly Truth prevailed. I just need to help him with LNKD now. But, as I've written before, if you gave a gift and the other person does not accept...to whom does the gift belong now?

My take on RIMM? Unless it is bought out/taken over or BB10 is a huge hit, it will be dead money. Opportunities for scalp trades will abound. I'd like to think BB10 and the PB February update would make a difference. However, as a few astute SA readers have pointed out, where there is smoke...there may be fire. BB10 may be too late for the party (it took only a year for RIMM's US market share to drop from 24% to 9%). RIMM has valuable assets that can make the company significant again; what it needs is a leader who can take it to the next level. Interestingly enough, analysts still rate it as a "hold".

For the purposes of closing the RIMM short thesis that was started on July 7 (using the lower short at stop entry of $25.82) and today's EOD price of $13.91; an ROI of at least 70% over 5 months would have been attained. Lucky?

As readers of my articles will know, I don't have enough talent to write for a living and compete for page views; no more RIMM short articles for me. I'll write about RIMM again when their transition looks promising.

Till then, happy holidays to all and may 2012 be another fantastic year for us all! Thank you for putting up with the Ugly Truth!

Disclosure: I am long AAPL.

Additional disclosure: Closed CRM short at $96.50. May short at stop RIMM at $13.25 for another scalp.