Research In Motion May Be Attractive With The Right Approach

| About: BlackBerry Ltd. (BB)
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How often can one change their mind on a company? Research In Motion (RIMM) reported earnings that could best be described as a mixed bag for investors. Many obviously had hopes the Ontario-based company would finally be able to report new hope. But after a new Apple (AAPL) sales report came out, everyone knew the odds started to look like a Mega Millions lotto ticket (odds about 175 million to one). It appears based on the report RIM no longer sells the most smart phones, even in Canada. RIM continues to lose market share and is not to the point of having to take non-cash losses on "blue sky" valuations on various parts of the company.

Sales fell 25% last quarter which independently may not be as bad as a one off type of event. But as a continuation of a string of results spiraling lower, one may fear RIM's sales may soon reach the "event horizon" (term used to describe the point at which even light cannot escape from a black hole) and the wealth of the company crushed from its own weight. In an attempt to avoid getting too near the edge, Jim Balsillie stepped down from the board. Mr. Balsillie recently stepped down as co-CEO along with Mike Lazaridis and they were replaced by a single CEO - Mr. Thorsten Heins - who has been involved with buyouts before. Along with Mr. Balsillie, Jim Rowan COO and Mr. David Yach CTO will no longer be with RIM.

I wrote about my bearish bias back in June 2011 (see article here) when RIM was trading near $40 per share. Clearly the price at the time of the article is a dream price for shareholders now. Shares are down about 70% from a year ago. In August I questioned if RIM would be able to make it another year and some really questioned my thesis. I maintain Google (GOOG) along with Apple will erode margins.

The good news is Google may come along and decide the infrastructure and patents are worth stepping up and bidding for. There are other companies we can make the case for buying RIM like Microsoft (MSFT) which recently demonstrated the company's willingness to make big purchases like Skype. Along with Microsoft, Nokia (NOK) may be looking at RIM either alone or with Microsoft. Microsoft is already working with RIM and would appear to have the front seat position for a takeover. Microsoft clearly has the financial and management ability to execute a transaction if they so desire. It could be a very profitable transaction if Microsoft is able to figure out how to retard the losses. Even a flat line in sales growth would be a big profitable victory based on current numbers. Back in August I wrote I was increasingly becoming convinced a buyout will be the path taken sooner or later with RIM. Now it appears the rest of the market is coming to terms with this highly likely probability.

Could a carrier take over RIM? I don't believe it's realistic for a carrier to look at RIM even if it may make financial sense. After the central planners in Washington put a halt to AT&T's (T) bid for T-Mobile (stupid decision in my opinion), it's hard to imagine any of the carriers wanting to expend much effort in exploring strategic synergies. So don't look for a bid that is worth much from the wireless carrier space.

One bright spot in the earnings report is the number of subscribers RIM continues to serve. RIM now has 77 million total BlackBerry subscribers worldwide, demonstrating the world is bigger than North America. While RIM did report a loss due to largely non-cash one-time events, the cash machine in Ontario did produce about 80 cents a share. With the market already discounting the company's valuation to near $7.3 billion there is not much premium for the "blue sky" of the company anyway. In fact the company has about $2.50 in cash for every share.

Changing my mind. After correctly calling RIM a short I changed my mind. Like the famous saying of "when the facts change, I change my mind, what do you do sir?" It is important to live this saying if you want to be successful as a self-directed investor. Since December I have successfully written options on RIM with a bullish bias. I closed out of my position this week in front of earnings, but will seek to find another entry point. RIM currently trades near $14 a share and I calculate the current "dead" buyout value to be at least $12 a share. Add in the fact they are cash flow positive (for now) and a much higher valuation can be justified.

With RIM trading with such intensive price movements, it makes perfect sense for me to look at options as the vehicle to make the most gains with the least amount of risk. I consider RIM first as a binary event investment (buyout or not), and secondly a recovery on its own. I believe CEO Heins is there to "sell the shop."

With this in mind I like a blend of several strike prices. First, selling covered calls with a look at the April $18. The premium is low, but a buyout is likely to move the price well above the current price and I would like to capture as much as I can. Secondly, a more conservative approach may be to sell the $15 or $16 strike price offering a lower risk profile and greater daily time decay with a downside of less potential gains. I will look for a pullback in price to position a blend of both strategies.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM over the next 72 hours.