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I am a 65 year old retired engineer and company manager. I have been investing in the stock market for twenty years. I was involved in engineering for the mining industry, so I like to write about mining companies. However, I will write about whatever catches my interest. I believe in value... More
  • BlackBerry – A Strategy For The Upcoming Short Squeeze 1 comment
    Mar 11, 2013 10:34 AM | about stocks: AAPL, GOOG, MSFT, BBRY

    Article text goes here...

    As of February 15th over 136 million shares of BlackBerry (NASDAQ:BBRY) had been sold short on the Nasdaq exchange. This represents approximately 26% of the outstanding stock of the company.

    For the past two years BlackBerry has been losing its share of the smartphone market to phones using Google's (NASDAQ:GOOG) Android operating system, and to the Apple (NASDAQ:AAPL) iPhone, and is now battling for a distant third place against Microsoft (NASDAQ:MSFT). In its heyday, when BlackBerry had the lion's share of the smartphone market, smartphones were primarily used by business enterprises to handle e-mail and cellphone communications in a secure environment. However, the smartphone market has changed and the purchasers who have driven the huge market growth are individual consumers rather than businesses.

    BlackBerry's failure to develop a smartphone with features that appeal to consumers, and to bring that phone to the market in a timely manner, has been the reason for its loss in market share and for the 90% drop in share price. The company still has a significant number of customers in the enterprise market, where its superior security is highly valued. However, even in this market, sales have declined, partly because of a trend towards BYOD (Bring Your Own Device).

    Blackberry sales in developing countries have held up well against the competition, primarily because of the BlackBerry messenger service which allows the sending and receipt of text messages at no cost. However, the phones that are sold in these countries are lower cost models with lower profit margins, and many have been sold at a discount to get rid of high inventory.

    The poor performance has forced a change in management at the company, with new CEO Thorsten Heins taking over from the two joint CEOs who had been in charge of the company since its inception. Heins seems to have made significant improvements to the operations. The payroll has been trimmed to reduce operating costs by about $1 billion per year and the company has announced six new phones to be launched this year including the Z10 which was launched in the UK in January, and the Q10 which is expected in April or May.

    The Z10 phone has been very well received by consumers in all countries where it has launched. A customer satisfaction survey conducted after the launch of the Z10 has placed BlackBerry firmly ahead of its competitors. A look through the comments attached to the above article will clearly show that support for the new phone amongst people who have actually bought and used it is overwhelmingly positive. Negative comments, on the other hand seem to come only from people who have never used the Z10 phone. A new feature which has been introduced in the Z10, and which is not available in any other cellphone, is the ability to have dual profiles (one for personal use and one for business).

    There have been no official sales numbers issued by BlackBerry, and none are expected before the issuing of the Q1, 2014 financial results on March 28th. However, based on statements from the company, it appears that the Z10 sales have exceeded expectations, with a significant number of phones being sold to customers who are switching from the Android and iOS platforms.

    The percentage of short interest is more typical of a company on the verge of bankruptcy. However, BlackBerry is a well financed company, with $2.7 billion cash at the end of the last reported quarter, no debt, and positive cash flow from operations.

    It is possible, if the Z10 sales are less than expected, the doom and gloom predictions which analysts have been putting out for the last two years may come true and the share price may once again approach its lows of around $6.

    However, there are several catalysts which may result in an increase in upside sentiment, leading to a major short squeeze and a very rapid increase in share price as the shorts struggle to cover their positions.

    I believe, given the overwhelmingly positive reception that consumers have given to the Z10 phone, and the undoubted financial strength of the company, that the short squeeze is the more likely of the two scenarios.

    In previous articles I looked at the valuation of BlackBerry under three possible scenarios, and made a Z10 sales forecast. In this article I present a strategy to cash in on the possible short squeeze while at the same time limiting losses if the worst case scenario should happen.

    The catalysts which I believe could trigger the short squeeze are:

    • A successful launch of the Z10 phone in the USA starting next week. The BlackBerry Z10 is clearly the most advanced smartphone and operating system on the market today. It will be sold at similar prices to outdated phones from Apple and Samsung. I see no reason why US consumers will not buy it in significant quantities.
    • Unexpectedly high sales of the Z10 announced in the Q1, 2012 results, March 28th. Indications from the company are that sales have exceeded expectations, what we don't know is what the expectations were.
    • A successful launch of the Q10 phone starting in April. Many BlackBerry users prefer the physical keyboard, and are waiting for the launch of the Q10.

    If a short squeeze happens it will be triggered by one or more of the above catalysts, probably before the end of April or middle of May. Buying options for mid-May would therefore seem to be the best strategy.

    A simple approach, which can be executed with a small cash outlay is to purchase call options. The $16 call option for May is currently trading for about $1. The $13 call option is trading for about $2. (I have rounded off the prices for simplicity)

    If I want to limit my losses to a maximum of $1,000. I can buy 1,000 call options with a $16 strike price, or 500 call options with a $13 strike price. The graph below shows what my profit and loss will be under these two scenarios:

    (click to enlarge)

    If the shares continue to trade in a range between $12 and $19, the call options with the $13 strike price are the best bet. If the price rises above $19, the strike price of $16 is the best bet.

    In this case I am playing for a rapid and significant rise in stock price caused by panic buying for short covering. I will choose the $16 call options.

    This is a speculative play with high risk and potential high returns. If the share price stays below $16 until May 15th I will lose 100% of my investment. It is a gamble, not an investment. I won't bet the house on this one but I will gamble a portion of my disposable cash on it.

    Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I am long BBRY, and I intend to buy more BBRY call options

    Stocks: AAPL, GOOG, MSFT, BBRY
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  • Spaceman Spliff
    , contributor
    Comments (56) | Send Message
    "If I want to limit my losses to a maximum of $1,000. I can buy 1,000 call options with a $16 strike price, or 500 call options with a $13 strike price"


    no. you can buy 10 call options @$1.00 or 5 call options @2.00
    15 Mar 2013, 02:15 AM Reply Like
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