MorningWord 11/27/12: $RIMM, Easy Money Made, Not An Easy Job Going Forward

by Dan November 27, 2012 9:20 am • Commentary

MorningWord 11/27/12: RIMM shares have rallied nearly 100% since making new 8 year lows in late Sept.  For those who bought the stock near the lows as a “trade”, that’s one heck of a trade, but for anyone who bought the stock btwn late 2003 and late may of this year, currently still have losses.  Looking at the stock from a purely technical perspective, and backing out to it’s inception in the late 90s (below), RIMM shares have plenty of room overhead, with $20 likely to serve as very serious long term resistance at the intersection of the prior long term support line and the long term downtrend line that has been in place since the euphoric all time highs made in 2008. I am not suggesting the stock will go to $20 anytime soon, which would represent further gains of nearly 65%, but I certainly don’t think the stock is a “layup” short here either.  Charts like this offer great opportunity and great risk all at once and I would suggest that the easy money has likely been made off of the bottom.

RIMM 13 year chart from Bloomberg


Aside from the technicals, what is fascinating about the RIMM tragedy over the last 10 years is that this company was a very real pioneer in one of the biggest technology trends in the last 100 years, mobile telecommunications.  Their epic fall from innovator, with a near monopoly of their space in a little under 5 years, is breathtaking. But rarely in this business do you see a situation where a once giant can resurrect themselves. It just hasn’t been done, except for AAPL of course.  RIMM will not do this, They have been playing catch up for years and ironically the stocks undoing can be traced back to AAPL’s introduction of the iPhone back in 2007, RIMM’s reluctance to  acknowledge the potential for full-screen touchscreens, and ultimately their failed entrance into said category with the Blackberry bold in 2008.

I have heard many reasons for RIMM’s recent strength, the most prevalent being the impending launch of new phones on their new BB10 operating system.  These phones will be dead on arrival, so any excitement built into the stock at current levels will likely be unfounded.  I would suggest the recent rally has little to do with fundamentals, and a lot to do with very negative sentiment towards the stock among investors and Wall Street analysts.  For instance, short interest sits at about 23% of the float, at a time where the stock was widely hated by almost every analyst who covers the stock. As of yesterday’s close the stock had only 6 Buy ratings (3 of which have come in the last week), 28 Holds and 16 Sells, with an avg 12 month price target of $9.14, almost 24% lower than current levels.

So what to do with it here? If you own it here, there is definite potential for disappointment as we get closer to the BB10 phone launch in Q1, but the technical set up could lend itself to further short-squeezy action, I contend the stock in no man’s land, but if it moves higher into the teens, the sum of the parts valuation argument becomes far less compelling than when the stock was a hat size.  We are monitoring the story closely, while we weren’t willing to stick our necks out when the stock was apparently overdone on the downside as there was no foreseeable catalyst, RIMM could set up as a great short in front of BB10 launch if the stock continues this parabolic move, but of course we would do so with defined risk as a take-out could always happen.




MorningWord 11/26/12:  I have to assume that I am not the only one, but all this talk of Grey Thursday Eve, Black Friday and Cyber Monday makes me a bit ill.  I get it, people want deals and maybe for some who already have 40 inch flat panel TVs, they choose to keep their sanity and pass on “door-busters”, but the truth is, who needs all the commotion when is at your fingertips 365 /24-7.  Amazon is truly the amazing equalizer to the bricks and mortar sales when you consider the avoidance of crowds, logistics of getting gifts to their locations, savings on gas and I am sure there are plenty of other reasons I am not listing.  

Now you have heard us say this before, and I’ll say it again, even despite AMZN’s 38% ytd gains, it is a truly great company for its customers, but the company’s course of sacrificing near-term profits for market share & unprofitable sales (see Kindle Fire) will ultimately cause a massive reset in its eye-popping valuation.  In our view, Amazon is the best not-for-profit company in the world.

Trying to get in front of this has been a costly endeavor for most investors/traders, and we will choose to make defined risk bearish bets when the stock looks and feels extended.  The stock is up 10% in just the last 5 trading days since bouncing off its 200 day moving avg, now banging up against some decent resistance at $240.  Looking at the 1 year chart below, it is evident the stock has traded in a fairly wide uptrend since the Dec 2011 lows, and while the recent move looks a tad steep, a test to the upper end of the channel could be in the cards in the weeks to come.

[caption id="attachment_19749" align="aligncenter" width="490" caption="AMZN 1 yr chart from Bloomberg"][/caption]


I would also add that while many consumers and investors fully expect AMZN to increase sales during Q4, analysts have modeled expected year over year Q4 sales growth at the slowest pace since 2008 (expectations are for Q4 sales to grow 28%, after 40% for 2009 and 2010, which were up from the 18% growth in Q4 2008).

As we head into the new year, AMZN price action will become of increasing interest for a trade as the company has disappointed investors over the past 2 years with earnings, margins and sales disappointments for the all important Q4, and the stock has reacted accordingly, with avg declines of about 7.5% following the prints.

For shareholders of AMZN, the next few weeks could be a volatile one as investors get bombarded with reports of winners and losers in the holiday selling seasons.  But also as we get deeper into the “fiscal cliff” compromise discussions, could a stock like AMZN become vulnerable to tax selling?  If I were long I would consider collaring the stock for little cost (as a % of the underlying) through Jan expiration (the company will report in Feb, but not listed yet).

For instance with the stock at ~$240, you could sell the Jan13 260 call at ~3.10 and buy the Jan13 230/200 Put Spread for ~5.00.  This structure would cost about $2, or a little less than 1% of the underlying stock price, but offer participation to the upside of about 7.5%, which brings you very close to the recent highs, but offer protection from 228 down to 200 btwn now and Jan13 expiration. If the stock is btwn 242 and 230, you lose the 2.00 in premium that you spent for the protective structure, and would suffer the losses of the stock btwn 240 and 228.   This sort of strategy is for relatively sophisticated investors, but worth considering for those with gains who actually don’t want to sell for tax reasons.

While I am cautious on the stock, and feel there will be a day of reckoning at some point, it has not been prudent to be outright short the stock.  For those who have been fortunate to ride the AMZN train, tactically protecting gains could make a ton of sense as we enter what will likely be a controversial period for the stock for a handful of reasons.