Research In Motion: Still a Contrarian Buy

Research in Motion (NASDAQ:RIMM) continues to be a roller coaster ride for investors. After enjoying a fantastic rally to start the year, the stock has since given back all of its gains and now sits dangerously close to hitting new lows.

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There is a lot of emotion surrounding RIMM stock, and it can be difficult to remain objective. A big psychological blow came recently when the Bureau of Alcohol, Tobacco, Firearms and Explosives announced it was dropping its BlackBerry devices in favor of Apple’s (NASDAQ:AAPL) iPhone, in part because of the iPhone’s better mapping and navigation applications.

The ATF’s decision would affect just 2,400 field agents; this is barely a drop in the bucket considering Research In Motion has more than 1 million users in the U.S. government alone.

Still, the news sent the stock down nearly 4% because it raised fears that RIMM was losing its grip on its most steadfast customers — government agencies and large corporate enterprises.

I hesitate to read too deeply into this headline. One agency’s decision to dump its BlackBerries hardly constitutes a trend. It makes for good banter on tech message boards, but it’s little more than noise.

There is, however, other news that deeply concerns me. My biggest bullish argument for RIMM is that the company is quietly transforming itself into a services company, undergoing a transformation not too different from that of IBM (NYSE:IBM) a generation ago. IBM largely got out of the hardware business and now focuses most heavily on long-term services and consulting.

See Also: It’s Time to Give IBM Props

Similarly, RIMM is setting itself up to be the premier smartphone management company for large enterprises with the launch of Mobile Fusion. Mobile Fusion will allow corporate and government IT departments to manage iPhones and Google (NASDAQ:GOOG) Android phones with the same level of control and security provided by BlackBerry Enterprise Server. The handset business could slowly wither and die, and RIMM still would have the potential to be a smashing success.

Alas, that dominance is not guaranteed. One of the reasons the ATF gave for its decision to drop its BlackBerries was the high cost of running BlackBerry Enterprise Server. The agency has decided to use cheaper providers going forward.

Again, the move of one agency does not make a trend. But what if the major carriers decide to push back on RIMM and demand lower payments for both BlackBerry Enterprise Server and its lower-end consumer alternative BlackBerry Internet Service?

Northern Securities analyst Sameet Kanade forecasts that RIMM’s current $5 monthly fee per subscriber could get pushed as low as $2. I have serious doubts about this (at least in the near future), but it does give fodder for thought.

In any event, RIMM still is attractive as a contrarian value play. RIMM is one of the cheapest company’s the world at current prices. It trades for 4 times earnings, 0.35 times sales and 0.65 times book value. You could sell off the company for spare parts and still make a profit. If Mobile Fusion is successful, the company would be a tempting buy even if it never sells another handset. And handset growth still is booming in many of RIMM’s key emerging markets. In places where data plans still are quite pricey, the relative efficiency of the BlackBerry relative to iPhones and Android phones actually matters.

But none of this means the stock can’t go sharply lower in the short term. And on a more philosophical level, there also is the risk that the investor bearishness toward this stock creates its own reality in the company’s fundamentals.

George Soros pontificated at length on this, even giving it a name: reflexivity. Standard financial theory would tell you that stock prices fluctuate as new information about a company’s fundamentals are released. In other words, prices react to the underlying fundamentals.

Soros, who ought to know a thing or two about stock trading, views this line of thinking as absolute rubbish. Sure, prices reflect fundamentals. But prices also affect fundamentals. Competitors smell blood when they see a sinking share price, and it gives them the impetus to attack harder. Would-be customers and suppliers also start to have second thoughts. And for companies with debts, creditors start to demand higher interest rates for the new perceived risk.

All of this is a long way of saying that investor bearishness toward RIMM could end up creating a self-fulfilling prophecy — and to a large extent, it already has.

With that said, I still believe RIMM could double or triple from current prices and still be cheap. But we still have to implement a little risk control. If RIMM falls below its old lows after it releases earnings later this month, I’ll recommend we sell. Stay tuned.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.”

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