BlackBerry Ltd (BBRY), the former king of the smartphone market, will step up to release its third-quarter earnings figures tomorrow amid a wellspring of negative sentiment for BlackBerry stock on Wall Street. The company is generally expected to post a loss of 6 cents per share on revenue of $938 million, but most of tomorrow’s focus will likely be on BBRY’s guidance — especially considering the buzz created by the launch of the new BlackBerry Classic smartphone.
Historically, BBRY is in the midst of a fundamental recovery. The company has topped the consensus estimate in three of the past four quarters by an average of nearly 47%. Analysts appear to have picked up on BlackBerry’s turnaround, with EarningsWhisper.com reporting a third-quarter whisper number of a loss of 2 cents per share.
That said, bullish analysts are few and far between. According to data from Thomson/First Call, BlackBerry stock has attracted just one “buy” rating, compared to 23 “holds” and 13 “sell” ratings. Additionally, the 12-month consensus price target of $10 rests just 2 cents above BBRY stock’s close at $9.98 on Wednesday. If the company can impress this dour bunch in tomorrow’s quarterly report, there is ample room for potential upgrades or price-target increases.
Pessimism is also prevalent within the short selling crowd. Following a more-than-12% increase in short interest during the most recent reporting period, the number of BBRY shares sold short now stands at 111.4 million, representing a hefty 23.2% of the stock’s total float. This wealth of short interest could provide ample fuel for a potential short-squeeze situation.
Recent options activity reveals that these shorts may be a bit concerned about BBRY’s short-term upside potential, as call volume has been on the rise in the past week. Overall, the December/January put/call open interest ratio arrives at a moderate 0.79, with near-term calls outnumbering puts on a stock with an otherwise very bearish sentiment backdrop. Calls are typically more popular than puts heading into an event such as earnings, but with shorts looking to cover their positions, I would have expected a slightly higher put/call open interest ratio.
Click to Enlarge Overall, front-month December implieds are pricing in a potential post-earnings move of about 9.7% for BBRY stock. This places the upper bound near $10.97, while the lower bound lies at $9.03. A rally would place BBRY back above its 50-day moving average and in contention with resistance at $11, while a decline would breach support at BBRY’s 200-day trendline and set the stock up for additional losses.
BlackBerry Bull Call Spreads
I know the consensus sentiment opinion on BBRY is to bet against the stock, even with earnings looming tomorrow. Still, with much of the company’s downside already pricing into the shares, there is the potential for at least a significant short-term rally for BlackBerry stock.
As such, those traders willing to take a risk might want to consider a Jan 2015 $10/$11 bull call spread.
At last check, this spread was offered at 34 cents, or $34 per pair of contracts. Breakeven lies at $10.34, while a maximum profit of 66 cents, or $66 per pair of contracts, is possible if BlackBerry stock closes at or above $11 when January options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
