Would you buy a BlackBerry (NASDAQ:BBRY)? For the average person, the answer is “no.”
Blackberry’s market share has slipped to the low single digits and the company is clinging by their fingernails to their long-term install base in corporate environments. However, even this territory is at serious risk as the Bring Your Own Device (BYOD) trend continues to gain acceptance in big companies.
Click to EnlargeBBRY is up a lot since the hype prior to the release of the BB10 operating system and the Z10 and Q10 smart phones really started to gain traction last year. However, as you can see in the next chart, the launch of those two new phones coincided quite nicely with a “sell the news” decline. That kind of price behavior is typical when hype is driving the price rather than value. The market has moved away from BBRY’s products and the company is not entrepreneurial enough to make up the distance.
Just to put the fundamentals in perspective – the last time the stock was at $18 per share (December 2011-January 2012) revenues were almost double their most recent quarter and earnings per share were over five times greater. Actually, that last statistic is only true if the most recent quarter’s loss is flipped to a gain. Traders seem to be betting on a turnaround that would require an unreasonable comeback in market share and strategic focus.
BBRY’s problems include factors they have very limited control over. Carriers and retailers are just not promoting the handsets like the ones from Samsung, Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and even Nokia (NYSE:NOK). The Z10’s initial launch has been so bad that even Goldman Sachs (NYSE:GS) who had been notoriously bullish on the stock removed it from their “buy list” on Monday. Citi analyst Jim Suva has continued to maintain that the stock should have a near term price target of $6 per share, which sounds about right to us as well.
Click to EnlargeWe have seen these kinds of problems before and the chart pattern looks very familiar. In 2009, another former market leader, Palm, launched the Pre handset to rave initial reviews. The stock had been trading below $5 per share and rallied over $15 on the rumor of the phone’s launch. Once the handset was released, traders sold the news until the stock was finally acquired by Hewlett Packard (NYSE:HPQ) in 2010. You can see the pattern for PALM in the chart below.
It is undoubtedly true that BBRY is a larger company than PALM and their install base in corporate environments is a distinct advantage, but momentum is momentum and we don’t expect BBRY to be an exception. On a short term basis, our timing for this recommendation has been triggered by the bearish engulfing pattern that emerged on March 24 as traders prepared for today’s earnings. This indicates a serious lack of buying interest and establishes a near term price target at $10 per share.
Click to EnlargeThe bearish engulfing pattern was confirmed by the gap lower on March 25, which is generally a very high probability short-term setup. There is always the risk that BBRY will surprise to the upside, but that is much more common when a company hasn’t already been running higher on rising expectations. The last time a bearish engulfing pattern emerged and was confirmed on the stock (Feb 7-11), the stock dropped 27%, but we feel comfortable with a more aggressive target when there is the potential for news to drive traders into a panic.
Recommendation: Sell short BBRY before earnings on Thursday, March 28. We are targeting $10.50 in the near term, although a longer term target closer to $6 per share is achievable over the next few quarters.
Besides the risk of a surprise, traders should consider the potential for a short squeeze. While we think it is unlikely, if the company does surprise there is already a large number of short traders who could decide to exit on good news. That can drive prices higher and much faster than expected. Currently there is approximately 32% of the floating shares held short, which is a VERY high ratio. For traders uninterested in shorting the stock before earnings, a short squeeze could present another opportunity to short if it loses momentum near $18 per share.
Options Alternative: Traders who are worried about a stop being skipped or a short squeeze may alternatively consider a long put position. Implied volatility levels are elevated but not as much as we might have expected considering the potential for a large drop on Thursday.
Right now we like the at the money puts in April at the $14 strike price for $1.50 or less. If the stock drops to our short term target, the intrinsic value of those options alone would provide a more than 100% return on the investment.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.