RIMM: Is Sentiment So Bad That It Could Be Good For the Stock Near Term?

by Dan November 11, 2011 10:29 am • Commentary

New Thoughts: RIMM has gotten a lot of press of late as it is trading at 5 year lows and below its book value.  The company has failed to win over consumers with its new phones or tablets and is miserably losing their monopoly among their installed base in the enterprise. One of the final nails in the coffin for these guys is that large banks, in an effort to cut costs, are starting to let their employees access their work email over their own personal devices through a company issued VPN….these personal devices are more often than not iPhones. This company has lost almost every recent battle and it feels like they are not far off from losing the war.

I have been extremely negative on the name (see some previous comments/trades below) over the last year and have had a few very profitable short trades over this time…..with sentiment as bad as it is though, there could be an opportunity near term on the long side. Short interest keeps edging up, now almost 10% of the float, the Street has absolutely abandoned their once overwhelmingly positive stance, now with only 8 Buys, 25 Holds and 19 Sells.

I think this company’s management, products and strategy absolutely suck, and I do think that if the company misses and guides lower when they report their Fiscal Q3 on Dec 15 that there is the risk of another leg down as we saw in NFLX last month……just when people thought it couldn’t go any lower it gets crushed…..again.   BUT if the company were ever able to come in or beat very low expectations and actually give credible, believable forward guidance the stock could rocket back up to the low to mid 20s.   Also, given the rock bottom valuation and some untapped value this company could very quickly become the focus of activist investors, and I don’t mean the Canadian type, I mean the rip your face off U.S. types like Ichan, Einhorn and Loeb. ( I have no knowledge that any of them are interested) So here are the trades:

2 Trades look interesting to me in Dec expiration isolating their Dec 15th earnings report…PLUS one very speculative Take out trade in FEB……

 1st TRADE: Low Premium, low risk, potential high reward, but have to get a lot of things right.…...stock ref 18.20 Bought DEC 20/22.5/25 Call Fly for .30

-Bought 1 Dec 20 call for 1.40

-Sold 2 Dec 22.5 calls for a total of 1.60(.80 each)

-Bought 1 Dec 25 call for .50

Break-Even on Dec Expiration:

Profits btwn 20.30 and 24.70 up to 2.20, max gain 2.20 at 22.50,

Losses btwn 20.00 and 20.30 of up to .30, btwn 24.70 and 25 up to .30 and max loss of .30 below 20.00 and above 25.00

1st TRADE RATIONALE: I like this trade because it offers about a 7  to 1 pay out if the stock  rallies about 20% btwn now and dec expiration.  That would normally seem like a fairly sizable move in such a short period of time, but the stock is down 68% ytd and has moved about 13% following the last 4 qtrs earnings.  Your max loss is the .30 in premium that you paid.  Now again, Flys can be expensive to trade and unmanageable, but if you believe as I do that the sentiment might have gotten just a little too negtive than this is a low premium defined risk way to play around a catalyst.

BY no means do I have any edge as to what the company is likely to report and by all accounts the direction of their business is not going in the right way….I still believe that they will not be a stand alone entity in a year, but from what depressed stock level will management finally come to this revelation.

2nd Trade: stock ref 18.20 BUY DEC 20 / 24 Call Spread for .85

-Buy 1 Dec 20 Call for 1.44

-Sell 1 Dec 24 Call at .61

Break-Even On Dec Expiration:

profits btwn 20.85 and 24 make up to 3.15, max gain at 24 or above make full 3.15 or 4x your money.

loses  btwn 20.00 and 20.85 lose up to .85 and max loss 20 or below lose .80 ~4% of the underlying.

2nd TRADE RATIONALE: I have less conviction is this largely because what looks like a fairly heft premium outlay while playing for such a large move for the max gain, which is up about 30% at 24.  You would only do this if you thought there was a good chance that the company put themselves up for sale or was likely to be bought or undertake some strategic partnership that could catalyze the stock higher.

 

3rd TRADE: TAKE OUT RIMM 18.30 Buy FEB12 25/30 Call Spread for .60

-Buy 1 Feb12 25 call for 1.10

-Sell 1 Feb12 30 call at .50

Break-Even on Feb12 Expiration:

profits btwn 25.60 and 30 make up to 4.40 above 30 make full 4.40

Losses btwn 25.60 and 25.00 lose up to .60, below 15 lose full .60

3rd TRADE RATIONALE:  you would only buy this call spread if you thought that possibly the company puts themselves up for sale soon and that they would see some bids in the new year.  This is high speculative, but there is no doubt the company could see a premium of about 50% which could see the stock in the high 20s….also with a market cap of only ~$10bln this would not be a difficult acquisition for a few different strategic buyers and I wouldn’t rule out a venture back play.

MY DISCLAIMER ON RIMM: I THINK THERE IS A GOOD CHANCE THAT THE STOCK IS A HAT SIZE IN THE COMING YEAR IF THEY DO NOT TAKE DRAMATIC IMMEDIATE ACTION TO RIGHT THIS SHIP.   I AM NOT BUYING THE DEC CALL SPREAD, BUT PUTTING IT OUT THERE AS A WAY TO PLAY FOR SOME THAT MAY HAVE MORE CONVICTION THAN ME.  I LIKE THE RISK REWARD OF THE CALL FLY, PAY .30 TO MAKE 2.20 IF YOU GET A FEW THINGS RIGHT IN THE NEXT 5 WEEKS.  ALSO THINK THE FEB CALL SPREAD COULD MAKE SENSE FOR THOSE WHO LOVE THE LOTTERY TICKETS.

-Technically the stock is extremely oversold and with sentiment so bad and expectations so low the stock could act like a coiled spring on the least bit of good news.

[caption id="attachment_6116" align="aligncenter" width="300" caption="1 yr RIMM chart from Bloomberg"][/caption]

 

 

Update Sept 15th, 2011:  Since putting this trade on last week the stock has essentially gone sideways (down 2.5%)…..there is a good bit of skepticism as you would expect heading into the quarter and I wonder at this point if  it all too obvious.  EARNINGS ARE TONIGHT AFTER THE CLOSE :I am convinced that this company is screwed as a stand alone, but with their mere $15bil market cap I wonder who could swoop in and buy them for their patents which they spent a lot of time and energy defending most of the 2000s and their installed base……heck GOOG paid a massive premium worth $12.5billion for MMI, someone could clearly pay $25bill for RIMM.

The Sept 29/24 Put Spread that I bought last week for 1.00 is now worth 1.30 and I am going to sell it here and roll into a further out of the money, lower probability play into earnings.

NEW TRADE: I am going to take the .30 profit and now buy the Sept 27.50/25 Put Spread for .60 (RIMM 29.60)  My break-even on tomorrow’s expiration is 26.90 on the downside and bwtn 26.90 and 25 I can make up to 1.90.   AT this point I have no clue what sort of guidance they will give and frankly don’t believe this man

agement one way or the other, so I want to risk less to make a bet that they will guide down.

Original Post Sept 9th 2011: RIMM: Report FYQ2 Next Week, Unless they Say “Exploring Strategic Alternatives” the Stock is Going Lower

Next Thurs, Sept 15th after the close, RIMM will report their Fiscal Q2.  The options market is implying about a 10.5% move vs the 4 qtr average move of about 10%….

I want to make a defined short play into the event………[private]

TRADE: RIMM $30.46 Buy Sept 29/ 24 Put Spread for 1.00

-Buy Sept 29 put for 1.25

-Sell Sept 24 Put at .25

Break-Even on Sept Expiration:

Profits: btwn 28.00 and 24 make up to 4.00, below 24 make full 4.00

Loses: btwn 28.00 and 29 lose up to 1.00, above 29 lose full 1.00

TRADE RATIONALE:  Stock has rallied 33% off of the summer lows and I have to think any incrementally better news is in the stock.  The company is going the way of Palm or NOK, it is unavoidable.  Unless they say we are “exploring strategic options” as been urged by a few large shareholders no one will believe their guidance.  Their products suck and their management and strategy are worse.  Their patents maybe worth something but I don;t think we will see a MMI sort of deal if a buyer just wants the patents, why own the declining asset of the handset business.

Technicals: Chart has a ton on air above current levels and given the recent run a good bit of enthusiasm on a short term basis.

[caption id="attachment_4581" align="aligncenter" width="300" caption="1 Yr RIMM chart from Bloomberg"][/caption]

 

Generally I am not in the business of pressing shorts, but to me this is a terminal short and I want to make short term, catalyst based defined bets.  I am risking what I am willing to lose and I like the 5 to 1 payout potential of the vertical spread….won’t take much on the downside to break-even given the stocks recent run.

RISKS TO THE TRADE:  There has always been the takeover speculation since the stock broke last year, and in an irrational market like we are in today, companies fighting for relevance can and will do dumb acquisitions (see MSFT for Skype and GOOG for MMI).   RIMM is very cheap on a valuation basis, but then again so was NOK and MOT the whole way down.

The Playbook tablet was likely a dud and if there is any good news on this front it probably has to do with some funky games the company plays by stuffing their selling channels rather than actually selling to end users…..

As for new products in the qtr they where obviously all evolutionary, not revolutionary.  iPhone 5 push out could have helped them a bit at AT&T and VZ as the life-cycle of the iPhone4 was getting old….

I guess my final take is that any good news on the margins or revenue re-acceleration I just don’t buy and would be a very near term phenomenon.  The company needs to spend a ton more on R&D to be at all relevant…..So unless they say they are dropping their OS for Android, or they are exploring strategic alternatives I think we could see a sell off back to mid 20s post any disappointing results or guidance.