Do you remember the good old days of the 1970's? The Nifty 50, the top performing stocks that everyone had to have? One would be at a cocktail party and be bragging how much money they made on Polaroid and Xerox (NYSE:XRX). The Nifty 50 were "one-decision" stocks because investors were told they could buy and hold forever. Fast forward a couple of short years to 1973: The oil crisis, dollar devaluation and war in the Middle East. From January 1973 to December 1974 the NYSE and the DJIA lost over 45% of their value recording one of the worst bear markets on record. The Nifty 50 were even more decimated. Seems not all that unfamiliar to today. Are we at the abyss with our new found Nifty 50?
Research in Motion (RIMM) can be considered one of the components of today's Nifty 50. It has had a parabolic move from an adjusted price in 1999 of approx $1.00 to a more recent price of $103. Credit Suisse recently upgraded the stock to outperform with a target of $160. The insiders are not buying and are on the sidelines.
When we look at stocks we approach from a fundamental as well as a technical standpoint.
Firstly fundamental, RIMM EPS per valueline 2007 is only $1.95, no dividend and a book value of $6.40. I know, I have been at some cocktail parties where the sky is the limit for RIMM and it can only go up. But I also know I am the oddball value investor, I don't like risk or overpaying.
One of the tools we use is to compare the earnings per share to the current rate of return for U.S. government bonds [4.6%]. According to many analysts this gives the intrinsic value. This shows RIMM almost 2.43 times overvalued. However this is not close to exact and shows what the company is relative to the return of government bonds. We use many tools but this is another confirming idea. The extreme high PE , low book value and no dividend are really not my cup of tea or vodka tonic at the cocktail party.
Now to the technicals. RIMM has violated a 50 day moving average, one of our volatility moving averages, as well as a Major Divergence signified by the MACD and Price action.
Combining both the technical and fundamental a strong argument can be made for a short trade.
Before you run off and put on a trade, have a plan. Know where the trade works and where it does not [such as the prior high of $137.01].
Currently we have no position in RIMM