MorningWord 2/01/13: The Great Divide From The Great White North – $RIMM $BBRY

by Dan February 1, 2013 8:55 am • Commentary

MorningWord 2/01/13:  At one point in the last decade, the Blackberry was the best thing to come out of the “Great White North”  since Pamela Anderson, backbacon, and obviously the Mackenzie Brothers.  RIMM for all intents and purposes, popularized the smartphone as they first infiltrated the enterprise market in the early part of the last decade, creating an insatiable demand with corporate users who eventually desired the same functionality for their personal use.  For better or for worse, this was a trend that was lost on consumer focused handset makers like NOK and MOT, and when AAPL entered the fray in 2007, it became a 2 horse race, and nearly put the formers out of business.  Other players like PALM did their best to attempt relevancy with big hires and big money backers, but once Android threw its hat in the ring,  it once again became a narrow field, and for the better part of the last few years, this race has no longer included RIMM.  

I am not going to go through the gory details of RIMM’s (soon to be renamed Blackberry, ticker BBRY) demise, but their media event Wednesday for their new BB10 operating system and new touchscreen phones is kind of their last shot.  I was not at the launch event on Wednesday, but from my discussions from those who were and some of the reviews from the media and Wall Street analysts, it appears that the new OS and the Z10 are impressive.  The gazillion dollar question is it too little too late?  Only time will tell, but time is not BBRY’s friend at the moment.  The delayed rollout in the U.S. of the Z10 (not expected until March) gives another few months of current Blackberry users just another reason to try the iPhone or Galaxy when their contracts roll out.  When we were on Fast Money Wednesday night my friend Jon Najarian of OptionsMonster made a great point that the he does not see a huge problem about the delay, and the mind-share that they gain from their expected SuperBowl Ad blitz will not be a waste as it is largely geared at CTOs of big corporations, which will likely hold the key to the device and the new operating system’s success.  While I agree with that, my sense is that BBRY’s issue is that more and more large corporations have decided against supporting hardware and are letting many employees use their own devices with a much cheaper VPN placed on the device that does much of the most important functionality that BBRY’s hardware intensive offering provides at a fraction of the cost with little additional security risks.  For example, more and more of my friends who work at large international banks, have the option to hand in their Blackberry and have a peice of software put on their personal device (9 times out of 10 it is an iPhone) and they only have to carry one device!  This is likely the biggest current threat to BBRY, and of course what I expect to be a lukewarm response from consumers who have largely forgotten about the benefits of push-email as it has become ubiquitous on most smartphone platforms, oh physical keyboards, really??

My sense is that even if the Z10 was crowned the hands down champ of the smartphone space, it would merely help BBRY lose less marketshare.  I am firmly in the camp that if you are interested in buying the shares, it should be for the sum of the parts value of the company.  The stocks recent volatility has been fantastic for short term traders, up almost 60% on the year at one point last week, and now down nearly 30% from those 11 month highs.  Ironically it was Lenovo’s comment that they would consider making an acquisition in the smartphone space, that market the near term top in the stock.   With the stock trading at ~$13, down from ~$18 just a week ago, the stock is a tough press on the short side, and $10, which is also the 200 day moving average, could serve as the new floor in the stock until investors get a sense for Z10 sales, which they will not likely get until BBRY reports their fiscal Q4 earnings on March 28.  April options will be the “own” so to speak.  If the company has any good news to report about their UK and Canadian launches over the next week or so I would suspect they would get it out as soon as possible, but the U.S. launch may come down to the wire and what they say, or more importantly don’t say on their Q4 call about U.S. demand could signal the stocks retreat back to the single digits.

If the stock were to touch $10 again the market cap would once again be at about 1.5x their cash level. The company has no debt, so burn will be a big issue if they can not stem the earnings decline.  I guess I will say it once last time, I have never seen a once dominant hardware provider in the tech space every be resurrected  with AAPL the exception of course.  I would strongly doubt that RIMM, or BBRY, or whatever they want to call themselves will be able to due so.  If the new OS and platform finds modest success I would expect the company to be sold, broken up or possibly be taken private, or some combo of all of the above.  IF BBRY were to sell off their hardware division I could easily envision a GOOG/MMI sort of deal, largely for patents and installed base of more than 75 million users.  So the lower the stock goes, the more interesting it becomes with even the hint of being able to maintain #3 smartphone market share status.  I am not a buyer here, but would be lower, and see very limited upside back near last weeks highs.


2 of Canada’s All-Time Best Exports besides Molson: Bob & Doug Mackenzie




MorningWord 1/31/13:  I think it would be a fair assessment that Q4 Technology earnings have been a bit of a mixed bag with more than 50% of the S&P 500 having already reported.  Pre-announcements prior to Jan were on the low side compared to the prior year, but that is largely due to the fact that earnings and sales estimates have been coming down for months if not quarters. And maybe just maybe, Wall Street expectations were finally in line with the current economic reality.

Last night QCOM reported results and guidance that appeared to be a bit of an outlier when you consider some of the recent data points from their customers & competitors.  The company had a meaningful beat in Q4, posting record quarterly profits and guided for Q1 above consensus.  The stock is up over 6% in the pre-market, testing levels not seen since last April.  QCOM is one one of the few large cap tech stocks to not only beat and show very healthy earnings and REVENUE growth, but to also guide higher.

QCOM has been on my radar since I placed a couple bullish trades in the name in mid December, and since closing them when the stock was a bit higher than here I have been waiting for a pull back to get long exposure again.  What strikes me most about the stock right here is that they are bucking certain trends that are hurting other mobile chip-makers while appearing to be a very unique value play.

As of last night, the company has ~25% of their market cap (~$109B)  in cash (~$28b) and no debt, compared to INTC that has a $106b market cap, ~$22b in cash and $13.4b in debt.  QCOM is expected to grow earnings and sales in 2013 at 11% and 20% respectively, vs INTC who analysts expect earnings to decline 10% on a 1% sales increase. QCOM trades at 14x 2013 estimates vs INTC at 11x.  Seems like a fairly obvious choice btwn the 2 mega-cap semiconductor companies   INTC is spending billions on building factories while QCOM spends on R&D to keep their lead in mobile.   Both company’s have monster share buy backs, while QCOM’s 1.57% dividend yield is chump change to INTC’s 4.2%, but I wouldn’t expect a company with QCOM’s growth profile to be so generous on that front as they still see ample growth opportunities.

I wouldn’t be chasing QCOM up above $67 and $68 should serve as serious resistance, but any weakness on a broad market decline I think you load the boat at $65 and ride QCOM’s strong execution in a difficult market .



MorningWord 1/30/13:  Some of you may find this all a bit boring, but yes, I think there is sentiment bubble in AMZN’s shares.  What exactly does that mean?  Much like AAPL over the last few years, it doesn’t mean for a second that the company has acted in a dis-ingenuous manner as it relates to Wall Street or investors.  Both companies have been steadfast in their general disregard for the norms of Wall Street, and merely “manage their businesses for the long-term”.  The problem has been with investors insatiable need to be in the next double or triple and their reluctance to let go until it is too late.

While AAPL’s rise started to feel a bit giddy in late 2011 after Jobs’ death, the stock nearly doubled over the following 11 months. So trying to profit by fading the bubble became a costly endeavor.  As I mentioned in the Word last Friday (here), there hasn’t been another large cap stock to best AAPL’s performance off of the financial crisis lows in 2009 than AMZN.  If we can all agree that the AAPL’s parabolic run in 2012 and subsequent decline reflected a sentiment bubble that likely burst, what can be said of AMZN?

As a trader who has been in and out of both stocks probably hundreds of times since 1997, I have been fascinated by investor sentiment, and more so in the last year, regarding both names than I was during the internet bubble of the late 90s.  At least back then it was obvious that it was a broad market mania.  In my mind what is going on is a bizzaro set of expectations, AAPL’s have been high and ultimately they could not continue to grow earnings any longer btwn 70 and 100% a year while growing sales 50% plus a year.  The stock merely fell as a result of the weighty expectations and investors concentration in the name either directly or through mutual funds or etfs.

IN the case of AMZN, earnings expectations had remained amazingly low, until this calendar year, where analysts expect the company to grow earnings from a measly .30 in 2012 to a new peak of 3.35, or up over 1000%.   Last nights disappointing results on both earnings and guidance for Q4 and Q1 2013 were overshadowed by the company’s slightly better than expected gross margin and operating income margin.  This is what the bulls have been waiting for, to see the company get a return on their dramatic investments in distribution, cloud and hardware over the last few years.  A continuation of this trend in the quarter to come could buoy shares, but if the company’s sales continue to decelerate at the current pace, and AMZN needs to put their pedal back on the spending metal so to speak, this would mark a dramatic change vs what are becoming higher expectations.  I am no longer in the business of picking tops, but as the stock opens this morning at new all time highs, you’d have to be crazy to put NEW money to work in the name.

My closing comments from my earnings preview yesterday still apply, but we are getting closer:


In My mind it is not matter of IF the bubble pops, but merely a matter FROM WHERE and WHEN, and again that is a game for those who can average in!



MorningWord 1/29/13:  Last night YHOO reported it’s first anual revenue increase (up 2%) since 2008, not particularly a huge accomplishment considering that sales have been stuck btwn $4.38 billion and $4.48 billion for the last 4 years, a period where GOOG has been growing sales on avg about 25% a year.  YHOO investors appear to be resigned to the fact that the company’s core search and ad display businesses are in a decline losing share to both the dominant players, and the upstarts.  YHOO’s board may have finally hit CEO gold with their choice of Marissa Mayer from YHOO this past summer, as she marks the 7 person since 2007 to hold the post, she is very likely the best suited person to turn the ship around.  With little to show for her short tenure, investors have bid YHOO shares up 30% since she agreed to take the spot, with little knowledge of her plans to return the beleaguered web property to its past internet glory.


Make no mistake about it, she has an uphill battle when it comes to the core business that is incessantly under attack from the likes of GOOG, FB and Twitter, and now facing similar platform challenges in their effort to remain relevant on an increasingly mobile online world as they attempt to monetize users on a 4 to 8 inch screen.  The good news is, YHOO investors don’t have high expectations for a quick fix, and they appear to be more focussed on the sum of the parts that make up the value of YHOO’s equity than the next mobile widget or content partnership.    With a market capitalization of $24 billion, the company has 1/4 of that in cash on their balance sheet and no debt.  In Q4 2012, YHOO bought back 80 million shares of their 1,054,000,000 share float, or approximately 7.5% and investors want more and possibly even a dividend.  On top of some good ol fashioned financial engineering, YHOO’s stakes in China’s b2b powerhouse Alibaba, and their stake in YHOO Japan are worth almost $10 a share, which ex their cash at $5 a share leaves investors paying little for their expected $1.12 in earnings in 2013.  But here is the rub, this was the same bullish thesis being made when the stock was $17, $18, $19 & now above $20.  At some point management will need to show some a path towards organic revenue growth through innovation.  If all of this seems like a lost cause in front of the watchful eye of Wall Street, maybe they use the proceeds of Alibaba once monetized and go the way of Michael Dell and take this baby private.

From a purely technical standpoint, the 5 year channel the stock has been stuck in appears to be ready to make a new range, but one thing is for certain, selloffs will likely be met with buyers for the for-seeable future.  From a purely visual perspective, at the low end of the highlighted range, and barring a material change to the values of their holdings, YHOO’s core business is basically valued at NOTHING.

5 yr YHOO chart from Bloomberg
5 yr YHOO chart from Bloomberg

Despite the investor euphoria with the stock, Wall Street analysts remain a bit more skeptical, as the company is rated with 7 Buys, 27 Holds and 1 Sell with an average 12 month price target of $20.27 (right where the stock closed yesterday).   And regardless of analysts’ wait and see approach, Mayer and her new management are likely  to maintain their honeymoon status with investors probably for at least one quarter after her first analyst/investor meeting that could be held in May/June time period as it had been under past CEOs.   I will be a buyer on broad market weakness, as I see little fundamental for the time being that should affect investor sentiment in the face of the impending Alibaba ipo in China.   I am not a buyer here, but on a healthy pullback to $18 or so could be a great entry point.





MorningWord 1/28/13:  The  SPX’s close above 1500 Friday, a new 5 year closing high, is fairly remarkable when you consider that one of its largest components, AAPL, over the last few years made a new 52 week low, and ceded its title as the largest market cap company in the world back to XOM.  The ability of equities both large and small to rally to new highs, without one of its biggest horses, is fairly remarkable when you consider just how narrow the broad market rally had been in 2011/2012.  To help make this point, at one point AAPL made up almost 5% of the S&P 500 last year when the stock was up 75% back in Sept, now with AAPL down 38% from the highs, the stock is the 2nd largest weighted stock in the index at ~3%, and the SPX is up 2.7% from the Sept levels.  The rally has broadened out, and this is obviously bullish for equities.  

The top 20 stocks in the SPX make up about 30% of its weight, and aside from AAPL, none of the other 19  stocks are trading at or within 10% of their 52 week lows, but there are a few very noticeable laggards, WMT,KO, T, MRK, MO, MSFT and VZ, that just can’t rally.  There are a couple things in common among these stocks, all either offer healthy dividend yields or they were perceived “safety trades” given their defensive nature throughout the European turmoil of the last 2 years.  The one year chart below shows the out-performance of WMT, KO & T to the SPX for most of 2012, right up till the mid Nov lows, and then, BOOM.

[caption id="attachment_22018" align="aligncenter" width="490"]1 YR SPX vs WMT, KO & T from Bloomberg 1 YR SPX vs WMT, KO & T from Bloomberg[/caption]

I guess there is a couple ways of looking at this, for every one of these mega-caps that is under-performing  there is one that is near or  making new highs, WMT/COST, KO/PEP, MRK/PFE, MO/PG, MSFT/ORCL…you get the point.  Bulls would argue this is a natural rotation, and if we have just entered a secular bull market, than ultimately these under-performers will add some fuel to keep the firing going at a later date as the rally continues to broaden out.

In the short-term, we’re watching price action in the vol market quite closely.  As long as protection stays so cheap, investors will have little incentive to sell their stocks, and will prefer to just stay long, and buy cheap puts instead.  If options start to get more expensive, we think you might see some stock selling as people lighten up positions as opposed to buying protection.