It can be a lonely life as a contrarian value investor. By definition, you constantly find yourself in the minority. And by betting against the herd, you are subtly (or not so subtly) sending the message that you are smarter than everyone else.
This is not the sort of thing that makes you popular at a cocktail party. When you are right, your acquaintances are by definition wrong and you look like an insufferable know-it-all. And when you’re wrong? Don’t expect any sympathy.
Still, taking a contrarian mind-set and, in the words of the great Warren Buffett, being greedy when others are fearful, is the only way to score outsized returns over time. To paraphrase another great investor, the late Sir John Templeton, you can’t outperform the market if you buy the market.
Of course, once in a while, the herd is actually right, and a cheap stock continues to get cheaper until the bitter end.
So, which is the case with Research In Motion (NASDAQ:RIMM)? Is the former tech darling the contrarian buy of the decade? Or is it a value trap, luring hapless investors with its siren song of cheap earnings multiples?
RIMM released its quarterly earnings yesterday after the market closed, and the news was mixed. The number of subscribers increased to 77 million, and RIMM’s cash balance continues to rise, up by $610 million to $2.1 billion. Yet revenue fell 19% for the quarter to $4.2 billion and the company suffered a net loss of $125 million. Adjusting for good-will impairment and other one-time charges, the company posted earnings per share of 80 cents, a penny shy of analyst expectations.
Investors have gotten used to disappointing earnings announcements from RIMM, so none of this should come as a shock. But this is where it gets interesting. RIMM finally appears to be taking its problems seriously, and major management changes are in the works. Jim Balsillie, former co-CEO and the man perhaps most blamed for the company’s recent turn of fortune, is resigning from board. He will certainly not be missed by RIMM’s beleaguered shareholders.
Additionally, two other high-level executives — chief technology officer David Yach and chief operating officer for global operations Jim Rowan — will be leaving the company. CEO Thorsten Heins is cleaning house; it’s a shame it wasn’t done sooner.
Surprisingly little was said about BlackBerry Mobile Fusion, which I continue to believe is the company’s best (and perhaps only) chance at staying relevant over the long haul. However, Heins did make it very clear in the post-announcement conference call that the company would be looking to refocus on its strengths in the enterprise market and look to new partnerships to address its weaknesses.
Some analysts took this to mean that the company is looking to eventually exit the handset business and focus instead on its core services business. I, for one, would encourage such a move. IBM (NYSE:IBM) made the painful decision to largely exit the hardware business a generation ago, and it certainly proved to be the right one.
Heins also refused to rule out an outright sale of the company, and given RIMM’s price, I view a sale as a real possibility and a potential floor on the stock price.