June 19
2011 / Research In Motion - Stock Symbol RIM (TSX)
or RIMM (Nasdaq)
A Personal Comment On RIM
Opinion Article
Liability
Waiver On This Article
Before reading further be sure you understand
that I am in no way qualified to give advice or
personal recommendations of any kind. I am not a
financial advisor. Everything on my site is
Trade At Your Own Risk.
Read the terms and conditions of using my site
here, or scroll to the bottom of this page
and read the disclaimer. This disclaimer is on
every page of my website. Stocks
are risky assets and losses can and often do
occur. Nothing you read is financial advice or
recommendations.
As everyone knows, the news
from Research In Motion was terrible on
Thursday. Analysts everywhere have downgraded
RIM stock, yet again. For the past couple of
weeks I have received hundreds of emails asking
my opinion on what an investor stuck in RIM can
do. I apologize for not being able to write
everyone individually and in a more timely
manner. I have to say at the outset that I am
not a financial advisor and I cannot offer
personal financial advice.
You can read why here. But in a nutshell, I
am not qualified in any way or manner.
In dozens of emails readers keep asking me what would I do if I was in RIM and had bought shares months or even years ago.
On a personal note I can say
that it is a tough, tough choice. I must indicate as
well, that if I was an investor in RIM stock I would
have been selling covered calls all the way down and I
would definitely have bought protective puts months ago
when the first earnings outlook dropped the stock like a
rock. The problem I have with looking at a stock like
RIM and offering a hypothetical "what would I do" answer
is that I have done nothing but write for more than a
year that RIM is not a stock for an investor. It is a
stock for day trading or those who do options like
myself. It's next to impossible to give any kind of
opinion on a stock that there is no way I would ever
have owned it. As well, every investor has different
needs, comfort zones, ambitions, goals, opinions and
capital available. It's pretty hard to give out advice
to someone you do not know, have never met, and have
absolutely no idea about their investing knowledge and
ideas.
Therefore I can really only discuss some general
information.
I do know that Research In Motion has
been a disastrous stock for millions of investors.
Whether or not this is the bottom or there is more
downside to come, I haven't a clue. The problem with RIM
is that investor perception is that it is losing market
share, which it is in North America, that the company's
management seems totally unaware of what is happening
and is therefore reacting too late. Investors are
bailing as they believe that the future for Research In
Motion will be worse for earnings and growth than is
being experienced currently. So while earnings are
presently good, and the PE seems unbelievably cheap and
every analyst for a long time loved the stock, analysts
kept repeating what a great buy it was and moaned about
how no one was seeing the "value" in RIM.
What these analysts did not see
was that investors dumping shares were doing so based on
their perception of the future of RIM and not the
present. Those investors dumping shares are aware that
RIM is making money, has a lot of cash, no real debt,
are a major smart phone provider with literally millions
of subscribers. Yes, they know all this. This is not
what they are focusing on. They are focused on the
future and they believe that future is not bright for
RIM. These investors see
the fact that market share is being eroded; "cooler"
smart phones have entered the market and captured a lot
of subscribers; RIM management seemed unfocused on their core
operation,
and indeed did seem to be spending more time talking
about hockey franchises than how they
were going to stay ahead of the competition.
I suppose some of this is the
fault of the market itself.
Research In Motion had
pretty well held a monopoly in the smart phone sector.
So much so that its users were called "Crackberries". That has all changed
whether real or just perception, it doesn't matter to
those investors dumping shares and suppressing the stock. Notice how it is
perception not the reality of the present, that is
driving the stock lower and most analysts didn't seem to
see this.
So while I suppose
there are many different
strategies that an investor could employ to try to
rescue the enormous losses, I would really need to ask
myself do I think this stock can recover. Since no
dividend is being paid and there is no talk of one to
come, the only way to gain income is through selling
covered calls or puts.
Every stock that I own I am
comfortable with. If Microsoft fell to $15.00, which it
did in the most recent bear market crash, I would be in
there buying the stock and selling calls and puts, which
is exactly what I did with Microsoft. As well Microsoft
pays a dividend, has a moat of cash, a wide assortment
of products, hardly any debt, excellent profit margins,
games and gaming system, patents galore and a management
that encourages individuals to work as teams and put
forward new ideas or improvements on existing products.
Nonetheless, analysts are mixed on Microsoft fortunes as
are many investors. The stock hasn't really done
anything in 10 years, but if it fell I would be
delighted to pick up the stock and sell options, all the
while earning income on the dividend.
I can say the exact same thing
with Intel, Exxon, Johnson and Johnson, Clorox, Royal
Bank, Bank of Nova Scotia and all my stocks. Even VISA
which pays less than 1% annual in dividend, I believe
has a great future. So my comfort level is very high on
those stocks I like.
I guess therefore I would have to
ask myself, does RIM fall into this category of comfort.
If it did then I guess I would be elated to get the
stock at a discount price and either buy more shares or
be selling puts to try to pick up more shares even
cheaper than where it is trading now. As well, a friend
sent in his covered call roll downs on RIM for investors
to review so I suppose that could be an option for
those who like RIM now and believe the future is bright
and there will be a recovery at some point. There is
also the article on
Bank Of America where an investor just kept selling
covered calls, being exercised out, and bought back and
kept selling more covered calls until he ended up with a
profitable position. In the article, it is the second
table.
I suppose another idea might
include buying shares and selling in the money covered
calls to try to earn some premium, get some protection
against more downside and hope to get exercised out
every month and earn a bit of money with every exercise.
For example an investor might have
bought stock on Friday at say $27.50 and gone out to
September and sold a covered call for $25.00 if they
could have earned perhaps 3.25 or 3.50 on the call. At
$3.25, if exercised, they would earn $25.00 + $3.25 =
$28.25, less $27.50 = 0.75 cents or 3%. By doing this
they are protected to $25.00 minus $3.25 = $21.75 as the
break even on the stock. The problem right now for this
type of trade is that there are no options presently,
below $27.00. That however will change probably this
week. So I suppose this might be an idea. At .75 cents
for each quarter an investor would earn $3.00 annually.
But if an investor had bought in at $70.00 or more, and
all that is earned is $3.00 a year and the stock falls
and stops at $25.00 and does not ever rise, it would
take 16 years or longer to just break even. That's a
long time to be in a stock waiting for a recovery and
hoping it doesn't fall lower which would make any
recovery even more difficult.
Another idea could be to sell the
stock and buy another stock and hope that the new stock
can move high enough to earn back the loss. However in
this market I don't know what stock to pick that can do
this. I always pick slow moving, trending stocks with
dividends, so the chance of any of them making me back
$50.00 in a year or two, is, well, pretty impossible.
I do know that years ago when I
started investing I lost lots of money. Then I changed
to
my strategy and over many years I rebuilt my lost
capital and then added more to it. But for many people
it is probably pretty boring and certainly not full of
exciting stocks. I saved as much as possible and kept
adding to my positions. Even if I only had a few hundred
dollars, I put whatever I could back into my
investments.
So rebuilding lost capital, takes
a long time, which is why I moved to my strategy years
ago and do everything I can to not lose capital. If that
means staying out of the markets at times or reducing my
positions, then I do it.
So that's my take on Research In
Motion. I am sorry I couldn't be more helpful. None of
what I have mentioned is financial advice or
recommendations. Remember that you trade at your own
risk and stocks are risky assets which can and often
does result in losses.