“There’s a difference between a high-quality company trading at a discount and a fire-sale company that’s on the verge of the junk heap.”
I wrote that line just three days ago in a column with the headline, “Buy Quality on Pullbacks, Not Stocks in Their Death Throes.” And aptly enough, one of my case studies was battered tech giant Research In Motion (NASDAQ:RIMM). The BlackBerry maker delivered an ugly earnings report after the bell Thursday and is being punished as much as 15% in early Friday trading.
Specifically, the company lost $518 million, plans to cut 5,000 jobs by the end of the fiscal year (about a third of its work force) and has again delayed its BlackBerry 10 model. The new RIMM smartphones won’t be on the market until the first quarter of 2013.
These headlines are pushing RIMM stock into the $8 range — its lowest share price (adjusted for splits) since 2003.
Think about that. Where was the world in 2003?
And back in 2003, now-defunct Palm shipped 4.2 million handhelds and did $870 million in annual revenue. Then Hewlett-Packard (NYSE:HPQ) paid $1.2 billion for Palm in 2010, only to write down $3.3 billion at the end of 2011 after the deal failed to yield any fruit and HP killed its mobile device plans.
In short, investors are valuing Research In Motion like it’s a decade behind in the smartphone race.
Can’t say I blame them.
Hopefully you were smart enough to steer clear of RIMM stock and put your money in safer, growing investments. Research In Motion’s downtrend was well-known and clearly established, and the risks were obvious.
But apply the lessons of this tech stock to the rest of your portfolio. Don’t cling naively to a bad investment on the hopes that it will get better against all logic and against clear market forces. And don’t go Dumpster-diving for an ugly stock just because it has a low price-to-earnings multiple (RIMM’s trailing P/E was less than 5 before this report) or because you want to be fashionably “contrarian.”
My favorite rule of thumb: Look at a stock as if you don’t own it, and ask yourself if you would want to make an initial investment right now — separate from the emotional baggage of your current profit or loss.
If you bought RIMM in 2008, you might have said to yourself “I’m too far in the hole — I just need it to bounce back a little more.” But if you didn’t own this dog with fleas, would you have considered buying last week? Last month? Last year?
If you don’t think your current holdings are a good investment at current prices, then move your money to something that is.
After all, it’s irrelevant whether you are $5,000 in the hole and wait for your position to rebound or whether you record a $5,000 loss and then move your money into a stock that delivers a $5,000 profit. Either way, you are back to even in raw dollars.
So simply ask yourself: “What is the best investment at this moment to grow my portfolio?” Hanging onto dead stocks or Dumpster-diving in the junk heap is no way to protect your investments.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.