BlackBerry (BBRY) has been a value trap that has ensnared more than its share of value hunting investors in recent years — yours truly included. Buying BlackBerry stock will also likely go down in history as the single-worst investing mistake in the otherwise illustrious career of Prem Watsa — the chairman of Fairfax Financial (FRFHF) and the man commonly known as the “Warren Buffett of Canada.”
Attempting to call the bottom in BlackBerry stock — and ultimately getting burned — appears to be something of a rite of passage.
Now, it’s Daniel Loeb’s turn.
Loeb’s Third Point Capital bought 10 million shares of BBRY stock last quarter, making him BlackBerry’s fourth-largest institutional holder.
I should start by saying that Daniel Loeb is no dummy. Although Carl Icahn was more vocal about it, Loeb was the first big-name hedge fund manager to take the opposite side of Bill Ackman’s poorly conceived short sale of Herbalife (HLF). Over the past 15 years, he has crushed the S&P 500 by more than 12 percentage points annually.
He’s also in good company. Although Watsa is the highest-profile BlackBerry bull, last quarter saw funds managed by Joel Greenblatt, Jim Simons, and Mario Gabelli all initiate new positions in BBRY stock.
So, what’s the story here? Did BlackBerry finally get so cheap that it was worth the risk?
Maybe. Even after the surge it has had thus far in 2014, BBRY stock still trades hands for just 0.57 times sales. And according to CEO John Chen, BBRY should be cash-flow positive by the end of this year and officially profitable by the end of the first quarter of 2016.
On paper, BlackBerry stock trades for 1.2 times its accounting book value. But bulls have long argued that BlackBerry’s real estate and patent portfolio are vastly understated and that the company could be profitably stripped down and sold for spare parts. I conceded as much in an article last month in which I discussed BBRY stock as a potential asset play.
Still, I’m not buying.
Loeb has a well-deserved reputation as an activist investor that wrings unrealized value out of underperforming companies. But I see BBRY as being too broken for even Daniel Loeb to fix. BlackBerry’s handset business is long past the point of no return. Shipments fell 41% last year — a year in which their competitors collectively saw sales rise by 39% — and BlackBerry’s global market share is now barely one half of 1%.
The most damning indictment of all? BlackBerry’s new high-end phones are even losing market share to in-house rivals; sales of older BlackBerry 7 phones grew to overtake those of BlackBerry 10 phones toward the end of last year.
I know, I know. BBRY is looking past handsets to focus on its future as a software and enterprise services company. I get that. And it sounds good.
There is just one massive problem with it: Virtually all of BlackBerry’s current revenue stream comes from handsets. About 40% of revenues comes from handset sales and 53% comes from services — but most of that are fees that users and carriers pay to access BlackBerry’s network … with BlackBerry handsets. If handsets disappear, so do most of BlackBerry’s revenues.
In other words, BlackBerry can’t afford to continue selling handsets, but it also can’t not afford to continue selling handsets.
It’s a terrible position to be in, and while I believe that CEO John Chen is making a herculean effort, I don’t see a clean way out of this.
So, what is Loeb’s game plan? Does he — like Watsa — believe that the company will turn a corner?
I don’t think so. My bet is that Loeb is positioning himself to either agitate for BBRY’s sale or dismemberment.
Can you profit by riding Loeb’s coattails? Maybe. But expect it to be a long, drawn-out affair, and understand that it might backfire spectacularly.
The more prudent move here is to simply walk away.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.