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What Investors Should Learn From Research In Motion

|Includes:AAPL, AMZN, BBRY, Whole Foods Market, Inc. (WFM)

Before hitting that buy order on your brokerage account, you most likely have played out multiple scenarios and done quite bit of research. After all, nobody wants to throw their hard earned money at a company that might take the cash and, in turn, provide you shares that then turn out to be worthless. However, doing your homework requires more than an investigation of earnings reports or share price movement. It also requires much more than a quick glance at the charts or an assumption that shares which have recently been crushed will automatically turn course. It requires a dedication to investigate a company's every weakness and its future outlook.

In this regard, one company investors should take a lot from is Research in Motion (RIMM). Why did this company go from near titan to forgotten failure and what should investors learn from those that lost thousands or more playing this stock? Also, which other companies out there are setting up for potentially similar downfalls?

Once a tech giant that rewarded shareholders with monstrous returns, Research in Motion has undertaken quite a freefall in recent years. Off over 90% from its June 2008 high of $148.13, the company is now faltering in practically every category. A demise that upon inspection most should have seen coming.

The most noticeable warning sign for the company's shares came in 2006 as shares doubled despite the fact earnings were not growing. In fact, the $1.10 full year earnings in 2006 were actually less than the $1.20 the company earned in 2005. As shares gained another $50 in 2007, it had become clear the move was based more on assumptions rather than figures.

Perhaps the greatest warning sign, though, came from the company's infamous Blackberry. Introduced in 1999, the company was one of the first to make its mark in the smartphone industry. However, that mark left the company prone to eventual struggles.

As more and more companies gained footing in the business including Apple (NASDAQ:AAPL), Research in Motion was left in a precarious situation. Throw millions and potentially hamper short term earnings and share price returns by making the next big thing to keep up with Apple's advances or look to curtail costs at the expense of consumers. Not surprisingly, the company chose the latter which became more devastating as witnessed by the well publicized outages last October.

Left now in utter disarray and dependent probably on a takeover to merely survive, the company should have taught investors some very important lessons. Those being to buy shares based on facts, not hype. With earnings expanding continually at other firms such as Apple, stocks are then protected from sudden sector woes or consumer spending cutbacks. However, based purely on speculation a stock such as Research in Motion is left to fall rapidly at the slightest hint of a slowdown. What's more, in the tech sector stocks that fall rapidly rarely recover.

It's also important to look at how a company performs amidst competition. Although a stock may dominate an industry for the time being, others will always follow and its a safer strategy to wait and see how the company performs against other titans before placing your bet.

Even today there are those that can be fooled by the company's disguise. Boasting $5.6 billion in market cap and showing earnings which had historically proven solid until this year, those fazed by the depths of research required to take up a position may be enticed to bypass all warning signs. Still, it remains the company itself which makes the best indicator of which direction shares will eventually turn.

With that said, here are two other companies investors should look to abandon before there share prices undergo similar fates.

  1. Whole Foods (NASDAQ:WFM): On the outside, the company has a number of things working in its favor. From solid earnings to shares reaching all-time highs, the stock has been a sure winner while many others have suffered recent setbacks. However, as with the Blackberry's initial success, Whole Foods is left in a market it dominates thanks to lackluster competition. For those looking to choose organic foods and lead healthier lives, the company stands nearly alone. Still, with the company enjoying such success one has to assume their business model will be explored and implemented by competitors. The end result of that is still to be determined. Also, with earnings growing at a meager 27% clip this year and the stock's PE ratio above 40, expect any correction to be overdue and significant.
  2. Amazon (NASDAQ:AMZN): The company may have blown away first quarter earnings estimates with a reading of $0.28, but that number was still less than the $0.34 the company reported in the first quarter of 2008. A time in which shares were trading under $80. Even more troubling for those that jump in on the $220 price tag the shares currently hold is that earnings overall are anticipated to contract 16% for the year. Somewhat of a disappointment considering the company has been pronounced as the cause of Best Buy's recent store closures and troubles. With earnings anticipated to grow by a 107% in 2013, it maybe best to wait for those figures to turn into more than just estimates before jumping in.

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