Courtesy of Karl Denninger of The Market Ticker
This is what I said on the 16th….
RIMMber reported last night and, well….. RIMMber is the right word for the market’s reaction.
We’re talking about a stock that, at present price, looks to be earning about $3.20/share next year and yet is selling this morning under $14. That is, it’s selling at 4x earnings.
And the earnings are real folks. So is the fact that the company is generating free cash from operations; there’s no indication that this is not the case (provided you don’t believe the firm is falsifying their balance sheet outright, and I don’t) which is ultimately the test for a company’s ability to remain around.
You take the inventory write-down on the Playbook out of the mix and the EPS last quarter was $1.20; that’s nearly $5/share in EPS annualized, for a P/E on an adjusted basis of about 3!
Why?
Simple — the belief is that the Blackberry is finished in the marketplace.
Not so fast folks.
My conclusion was that both stocks were worth a punt, with the potential upside being higher for Sprint, but certainly there for RIMM.
RIMM continued to bleed. Until last night, when reports appeared that Amazon, Microsoft and Nokia were all interested in the company in one form or another. (Incidentally there was a fair bit of options activity yesterday near the money — you don’t think someone might have known about that leak, do you?)
That was good for more than +10% in the aftermarket and it has carried over more-or-less intact to the premarket this morning. If there’s substance to those rumors the stock is going to go a lot higher, and fast.
When you look at this from a chart perspective it’s right on the gap from the earnings release. There’s air up above here if the shorts cannot hammer it back down, at which point the squeeze potential turns from rumbling into a tsunami into the upper $14s. How much further it can go than that is an open question, but that’s a hell of a move if you got involved anywhere during this last slide. About 8% of the float is short — compare against hated stocks like BAC with ~2% of the float out. Hmmm….
Just be aware that we’re talking about rumors here, but this little story points out one of the hazards of piling into a stock that falls on ridiculous overvaluation (entirely warranted) and then has a couple of earnings misses but in fact is earning money and has no debt — and therefore no liquidity risk.
It only takes one positive rumor against that fundamental backdrop — yes, management is acting like a bunch of clowns, yes, the firm has market share issues, and yes, they missed earnings, but the company is profitable, it is not burning through its cash and it has no debt and therefore no covenants to violate.
Being stubborn on a short that pays and insisting that the firm is going to zero is an article of fath. If you want to bet on zeros you’re far ahead of the game to pick on companies with monstrous amounts of debt (leverage) that are in fact making losses and, on your analysis, are unlikely to be able to put a stop to it before they step on a mine somewhere and blow themselves up.
Disclosure: Yep, I’m playing… who knows for how long.
