In any event, RIMM still is attractive as a contrarian value play. RIMM is one of the cheapest company’s the world at current prices. It trades for 4 times earnings, 0.35 times sales and 0.65 times book value. You could sell off the company for spare parts and still make a profit. If Mobile Fusion is successful, the company would be a tempting buy even if it never sells another handset. And handset growth still is booming in many of RIMM’s key emerging markets. In places where data plans still are quite pricey, the relative efficiency of the BlackBerry relative to iPhones and Android phones actually matters.
But none of this means the stock can’t go sharply lower in the short term. And on a more philosophical level, there also is the risk that the investor bearishness toward this stock creates its own reality in the company’s fundamentals.
George Soros pontificated at length on this, even giving it a name: reflexivity. Standard financial theory would tell you that stock prices fluctuate as new information about a company’s fundamentals are released. In other words, prices react to the underlying fundamentals.
Soros, who ought to know a thing or two about stock trading, views this line of thinking as absolute rubbish. Sure, prices reflect fundamentals. But prices also affect fundamentals. Competitors smell blood when they see a sinking share price, and it gives them the impetus to attack harder. Would-be customers and suppliers also start to have second thoughts. And for companies with debts, creditors start to demand higher interest rates for the new perceived risk.
All of this is a long way of saying that investor bearishness toward RIMM could end up creating a self-fulfilling prophecy — and to a large extent, it already has.
With that said, I still believe RIMM could double or triple from current prices and still be cheap. But we still have to implement a little risk control. If RIMM falls below its old lows after it releases earnings later this month, I’ll recommend we sell. Stay tuned.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.”