Courtesy of Karl Denninger of the Market Ticker
We got a RIMM job last night with the stock trading premarket down ~15% from the close yesterday after the firm reported a dramatically-softening earnings picture and intent to "soft restructure."
If you remember back on 9/27 of last year I wrote about a potential pair trade: Long RIMM / Short Apple. RIMM closed at $48.36 that night; Apple $291.16.
At a 6:1 ratio (dollar-delta neutral) through February OpEx this trade returned +46% for RIMM and (25%) for AAPL. Assuming you exited there you had a nice trade. For those who wish to take cheap shots (and you know who you are), those are the numbers. Argue with the math.
If you waited another month Apple was (13.6%) and RIMM +26%; you still had a winner.
I don’t know about you folks but there are damn few people who would argue with a six month trade that had a return of about 13%, and better if you were fast – 20% in five months is even more impressive. Annualized on the six month trade that’s a 27.6% return and on the 5 month one it’s well north of 40%! You didn’t need to catch the absolute corner on the trade for it to work either, which is exactly what I was looking for in that analysis – a nice beta-adjusted return – and that’s exactly what was validated by performance.
When I write about these things they’re trades; that’s what I do. Another example from the forum, more-recent (last couple of days), is this, which if you’re a gold donor on the forum you can verify this with timestamps:
Incidentally I got back in on the /DX trade; stop B/E at 74.67: http://tickerforum.org/akcs-www?singlepost=2587003
That was a trade put on in a fair bit of size; in the morning yesterday I said:
Stop held on the /DX trade; I’m still in it. At present it’s just under 76 and will be moved up as the day progresses. http://tickerforum.org/akcs-www?singlepost=2589521
And a while later:
Out on /DX long; Cha-CHANG http://tickerforum.org/akcs-www?singlepost=2589604
(that was 76.20, incidentally)
Do I get ’em all right? Oh hell no. But these are time-stamped and for those who have signed up for sock-puppet accounts on the forum, and are spamming my Seeking Alpha posts on the Apple pair trade these are the actual numbers – with intra-day timestamps.
The last couple of months have been what anyone would call a "target rich" environment, especially in the FX. The market has been trading very nicely on a technical basis, which is just plain old-fashioned great for those of us who like sticking our heads in the old LCD monitor stack. I prefer trading in the futures over cash FX markets for a whole host of reasons I’ve talked about in the past in this column (and which has drawn the ire of a number of folks who love the FX industry, maybe because they work in it.) Nonetheless the opportunities have been exemplary in the futures markets the last month or so and I’ve done damn well capitalizing on it.
Having put the actual record on that previous observation on RIMM on the table today I want to talk about RIMM going forward.
The company said several things last night:
- They’re going to miss on earnings next quarter. Big surprise – NOT. Confessional season is starting. You may not be noticing this, but I sure as hell have been. If you read here regularly you know that I’ve been noting the cost-push pressures and margin compression building since last August. That’s in the pipe and cannot be avoided. At the time I predicted that it would be somewhere between six and nine months down the road before it started to be recognized in the output side of the market. Well?
- You may think QNX is a nothing. I didn’t at the time it was announced and still don’t. Then again I’ve got nearly 30 years of experience writing hard real-time code of various sorts and know what goes into a lightweight kernel that actually performs this job, and how it can transform what would otherwise be an unusable device into something that’s damn snappy and nice.
- The fact is that handheld devices are power-starved and always will be power budget limited. This is physics – energy storage requires mass; you can shrink volume to a point but the mass is still there as the reaction is a chemical one. QNX has the potential to turn this market on its ear compared to the "Linuxish" kernels in both Android and iFeminineProduct line.
- There is no guarantee of success. RIMM can certainly screw this up. A good kernel is a big deal, but if you can’t implement the rest then it doesn’t matter. Execution counts and there’s no way to know how RIMM will perform in this regard.
RIMM put forward a roadmap to do exactly this. QNX coming to their handsets is important but a year away. I’m not impressed with the timeline, but if it means they get it right out of the gate instead of what Android did – releasing what by any account was a "half-finished" operating system in the 1.x line and requiring a couple of years to reach a "usable" (2.1) status, that’s a winning strategy over the alternative – especially considering that RIMM will be coming into a field with mature competitors.
Then there’s the technical argument. The 3-year low is right around $35. We’re going to blow that this morning decisively, with the stock trading pre-market at about $29.50. On a weekly basis the technicals are severely oversold and have been since the beginning of April – it’s only going to be worse once the stock starts trading:
On a fundamental analysis basis the company is trading at an implied P/E of about 5. The company has no debt and is trading at a price to sales of under 1. They need to restructure to reduce costs but this is not an over-levered firm trading at a ridiculous multiple as it was in 2008 when the company was trading at nearly five times it’s current price and there is no debt overhang. Their stock buybacks were idiotic but at least they didn’t finance the purchases as many companies have in the low-interest rate environment.
There’s nothing in the options market that entices me with implied vol’s in the stratosphere (although that may come in now that earnings is behind us; the only trade that looks even reasonably-decent is the Jan ’12 $35s at a bit over $2) but a small speculative long-side play makes sense here to me, with a horizon of six to twelve months. If the entire market goes to hell (and if you’ve followed my macro view you know I’m a believer in the thesis that it very well may) then RIMM won’t be excused from that party but if it doesn’t I think there’s a 20%+ upside here – which just gets us back to where we were before it all went to hell last night.
This is a high-risk position and IMHO requires good money management and a willingness to accept a stop at a reasonable loss; obviously if the firm gets flushed then attempting to add into a drawdown will wreck you, so if you’re not able to accept being wrong on this one don’t do it. But with a targeted gain/loss ratio of about 3:1 I like the play with a reasonable stop-loss and a willingness to walk away if you’re proved wrong on it.
Disclosure: I’m in @ $29 premarket.
Update 10:30 AM CT: Those CALLs are now $1.60 – that’s a bit more attractive. Of course the stock is down another buck and a half from where it was premarket – the question becomes whether you think that buying a company’s stock that has $4 in cash and a price:sales ratio under 1 is worth a punt. IMHO if anything the argument looks better here, two and a half hours into trade, than it did at the open.
