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Steve started his career as an design engineer focused on evaluating evolving technology while obtaining his MBA in Internationally Finance from Wilfred Laurier University in Waterloo. Forced into early retirement due to a handicap, he is now a value investor focused on technology firms. He... More
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  • BBRY: Short Squeeze May Never Happen

    There has been much speculation lately that BBRY will at some point experience a short squeeze. According to 'Investopedia' a short squeeze typically occurs when unexpectedly good news causes a stock to increase rapid (typically more than 10% in a single trading period) which in turn leads some individuals holding short positions to be forced to cover. This in turn, triggers additional shorts to decide to cut their losses by covering further driving up the stock... often the result is an increase in price well above what otherwise the positive news would warrant.

    By this definition many recent stock events referred to as being 'stock squeezes', particularly many of those which the triggering event has been attributed to being the release of strong positive financials, fail to make the grade since the increase in price is entirely warranted by the unexpected news. In these cases, the uptick is simply a correction and just by chance shorts are hurt in the process.

    The mother of all stock squeezes was what happened in 2008 to Volkswagen (OTCMKTS:VLKAY). The stock was driven up from 210 to 1000 in less than two days, before falling back to 500 a day later (the level justified by the news alone).

    (click to enlarge)

    Market Capitalization

    Although not always the case - the risk of a short squeeze occurring is higher for a small to mid-cap company than a larger company since all positive news needs to do to trigger a squeeze is attract a single new major investor. Furthermore, as a greater concentration of shareholders is common with a mid-cap this can also reduce liquidity.

    BBRY definitely meets this criterion with around $8 Billion in market capitalization and several major holders either recently increasing their holdings or publically stating that they have no interest in selling the stock they hold.

    Short Interest

    The higher the short interest in a company, the greater the risk of a short squeeze. The higher the short interest, the greater the chance that some of the shorts will either need to cover or will decide to cover to cut their losses when a rise occurs. It is not as much the level of short interest alone that drives the price up but how the stable the shorts are and how short interest relates to stock liquidity.

    Traditionally the indicator used to calculate this is a simple "Days to Cover" calculation. In the case of BBRY this can be calculated as follows:

    • Short Interest = 171m NASDAQ + 14m TSX = 185m (TSX data from TMX Consolidated Short Positions as of April 30th, 2013)
    • Short Interest as % of Free Float = 37.4%
    • Days to Cover = Short Interest / Ave Daily Vol.
    • Ave Daily Vol. = 33.9m NASDAQ + 3.8m TSE
    • Days to Cover = 185m / 37.7m = 4.9 days

    However, it is my belief that there is a major flaw in this method - it does not take day trading into account. This trading can represent an extremely high portion of the daily volume for a stock with high intraday volatility (for months BBRY has rarely been below 3% each day).

    So far, it would appear that the perfect storm is brewing - but this is where the case for a short squeeze.

    Triggering Events

    To start the ball rolling, a significant usual unexpected news event needs to occur which in turn triggers a major upswing in stock price.

    • In the case of Volkswagen it was the news that quietly a large portion of the shares had been quietly purchased by a major investor.
    • In the case of NFLX, although the squeeze occurred around the time of the release of the quarterly report, it is generally believed that a certain influential investor waving his wand over the stock was the real trigger.

    Something similar needs to happen to BBRY. Realize that although many people have postulated that a strong quarterly report will be enough of a trigger... would this truly be an 'unusual unexpected event'? Quarterly reports beat the market all the time.

    News Manipulation

    I doubt that anyone would argue that Bears have proven to be masters recently at manipulating investor news surrounding BBRY. The latest being the quick response by Pacific Crest discrediting the 'positive' news regarding production increases. Normally news suggesting that a firm is increasing production would result in the stock increasing in value, but James Faucette managed to place such a negative spin on the news that share value dropped.

    What is particularly interesting with regards to JF's latest claims is that he managed not only to discredit the positive news, he twisted things around so much that he was able to turn in in to bad news suggesting that the increase was nothing but a means to manipulate the upcoming quarterly report so it shows artificially inflated sales numbers. Basically he claimed BBRY increased production in order to fraudulently increase sales by stuffing channels with unsold inventory.

    What people don't see is that not only would this be illegal, but the timing of the news is wrong. Increasing production in June (i.e. corresponding to when BBRY would start receiving the increase in components from increased orders in late May) would have no impact on the numbers in the upcoming quarterly report since the quarter will already be over.

    In the process not only did he undermine the news and introduce doubt in the minds of investors regarding the accuracy of numbers in the upcoming financials but he also significantly increased investor expectations regarding reported sales volume this quarter. By not disputing the component numbers, he endorsed that 'component orders suggest that Blackberry sales this year may be 40 million' which equates to 10 Million this quarter.

    Previous Quarterly Report

    Think back to the last quarterly report and how the Bears shifted focus from positive financial indicators like profit to negatives like loss of subscriber base. Have they not already laid the ground work to do the same this quarter?

    Consider statements from various sources suggesting that 'although the next couple of financial reports may be positive, investors should not be fooled by these results as these results are expected due to pent up demand and are not sustainable long term'.

    Then consider that we already have evidence that the drop in subscriber base to be reported will be significantly higher than expected. At the recent Blackberry conference Thorsten Heins stated 'BBM had 60 million subscribers' which although 'impressive' on the surface represents nearly 20% decline from the 2012 Q4 number of 74 million. This is well above the single digit decline Heins suggested investors should expect this quarter at the time of the last quarterly report. How will investors react if the quarterly report confirms this large a drop?

    The bears have already placed the emphasis where they want it for the next quarterly, on subscriber base rather than profit. As such, the report is almost guaranteed to bring 'bad news'.


    That all said, their is still a chance - I just don't feel that it is as high as some seem to believe. Something significant may happen, just not the upcoming quarterly report. A few I see as possible triggers are:

    • Successful BBM Release on Android / Apple. This could increase BBRY exposure bringing in new investors - problem with this is that the small investors this would attract would likely not all invest at the same time and hence no major uptick in price but rather just slow progression.
    • The quarterly report not just reporting strong financials but also reporting increasing subscriber base (financials alone I don't believe will be enough).
    • Partnership / Sale of Company. If their is strong evidence of a suitor willing to pay a premium to buy the company or a logical alliance (such as Lenovo taking over hardware manufacturing).
    • Major New Investor. In light of the success that Bears have had with pushing that any recovery will be short lived, it is unlikely a single positive quarter report will pull one in BUT one interested in triggering a short squeeze is a possibility.
    • Ratings upgrades from Significant Investment Firms (considering recent downgrades I don't see this likely -

    I am long BBRY and feel that long term I will do quite well as the stock slowing climbs to a more reasonable price level considering the firms financials. I just don't believe that a short squeeze will happen - rather, with how manipulated the stock would appear to be, if the next quarterly report is as strong as anticipated I just see the shorts graciously exiting their positions over the next few months.

    Disclosure: I am long BBRY.

    Tags: BBRY
    Jun 06 9:17 AM | Link | 13 Comments
  • BBRY: Why AT&T Delay May Be Good News

    Although US Q10 Launch is underway, only T-Mobile has confirmed they will be able to get stock to their stores this week. Verizon along with AT&T are saying that they are currently unsure when they will be able to start shipping devices to stores.

    The initial response by the market appeared to have been negative as BBRY was down upon release of the news. That said, what is ironic here is that this could actually be extremely positive news with regards to how well the Q10 is doing in the US market. Consider the following:

    • T-Mobile rather than taking preorders on-line choose instead to simultaneously launch both on-line and retail later this week once stock from BBRY has been distributed to stores.
    • AT&T and Verizon both choose to accept pre-orders online.

    Verizon indicated last week when they started accepting preorders that devices would be in stores this week. This change suggests they may have been overwhelmed by preorders and are working to fulfill that demand before shipping to retail.

    In the case of AT&T, who are currently shipping devices to their corporate clients, the refusal to even discuss a retail launch date further supports the possibility that BBRY may be having trouble meeting demand.

    This indicator strongly contradicts claims last week by Pacific Crest Securities' James Faucette suggesting that although BBRY is manufacturing in excess of 2m BB10 devices per month, BBRY is building too much product to sell and will have to write down the excessive inventory in the future at a significant loss.

    Tags: BBRY
    Jun 06 9:08 AM | Link | 1 Comment
  • BBRY: Why Is The Price So Low?

    There has been a lot of speculation regarding what is driving the price of BBRY down. What many bulls seem to forget (and bears like to pray on) is that the best way to destabilize the price of a stock is to introduce unknowns.

    The few 'official' announcements over the past month from BBRY have exponentially increased the unknowns and I feel that the market is reacting to this. Yes the moves may prove to be good in the long run and have the potential to yield big returns BUT they could also backfire on the company. To make matters worse, not enough information has been released in order to project how any of these will effect the bottom line.

    BBM to Android & Apple - This is a real two edged sword, since BBM is a competitive edge right now helping to drive handset sales it could hurt those sales.

    Right now one big selling point of BBM is that, unlike other services (Twitter for example), it isn't bogged down heavily loaded with advertisements for revenue. Does 'free BBM' equate to 'Add Supported BBM' and if that is the case then how will that impact things?

    I was surprised at the 'wide open' and 'free' move as I had expected that it would have been tied to BES 10.1... but are we talking just about the app being free or no need to pay monthly service fees?

    Was this step simply taken to seal the deal for BES 10.1 adoption by the DoD and other firms to allow for the adoption of a unified messaging platform? In other words, are we looking at a strategy like that deployed by a number of successful software companies who 'give away' software for 'private use' then make their profits by charging 'corporate customers' who are required to purchase their products?

    I have seen a lot of speculation regarding how this may play out but no details directly from BBRY hence unknown 'risk' for investors.

    Q5 - Although on the surface this device would seem to be a positive move to stem the tide in the emerging markets, BBM is the main selling point for BBRY in these markets. People have been willing to pay more for the phone since BBM allowed them 'free communication' once the monthly talk time had been used up. Giving BBM to Android kills the competitive edge placing the Android on an equal footing to BBRY.

    Given this, will the Q5 be priced low enough to compete with the $100 Android and if so what will the margins be? Only upbeat point is more of the really low priced Android phones still run on some version 2 variant of Android and BBM is reported to require at least Android 4.01.

    Z10/Q10 Sales - Absolutely nothing firm has been reported officially with regards to how well these are doing.

    In addition, both 'Free' BBM on Droid devices and introduction of the lower margin Q5 which I suspect will eventually make it to the North American market have the potential to cannibalize Z10/Q10 sales.


    I still believe everything will work out in the end - but how these moves (in particular 'Free BBM') will improve the bottom line has not been explained... and I find that a little unsettling.

    BBRY needs to take action and answer the 'investor concerns' raised by these announcements or I can see further turmoil coming. Tell us where the money is going to be coming from!

    Hopefully these questions will all be answered during the quarterly report teleconference.

    Tags: BBRY
    Jun 05 11:18 PM | Link | Comment!
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