Where would RIMM be trading if the company earned 1 cent a share?
Forgetting about the actual BB10 for a minute, and its capabilities or lack thereof – which everybody seems to be stuck. A trader or investor in RIMM doesn’t have to be a seer technology guy/gal to figure this out while using model price charts.
If any public company earned 1 cent a share chances are they would be trading at EBV or our green line. Why? That is our definition of book value. This isn’t accounting book value that the industry uses; it’s our – model price – definition of book value.
So what are the chances of RIMM earning at least 1 cent a share? I think high to very likely. Even if the BB10 doesn’t sell very well certainly RIMM could lower expenses enough to break even couldn’t they? Of course they could. So let’s pick an analyst at random. Say, Gus Papageorgiou at Scotia. Gus has RIMM still losing $1.15 for fiscal 2013 (RIMM’s fiscal year end is the end of February) and making $0.86 for fiscal 2014.
So let’s go a step further. Say RIMM can earn $1 a share. Where would RIMM be trading? RIMM would be trading at EBV+2 or EBV+3. Why? See I didn’t choose $1 by accident. $1 just happens to be the theoretical earnings of RIMM’s balance sheet. And when companies can earn their TE, they usually trade at these levels, EBV+2 or EBV+3, even if there is no growth in their business. (See model price chart below for EBV level values on RIMM.)
So forget about the BB10, and it’s capabilities. Just think about the probabilities of outcomes. Can a public company break even? Can a public company make their theoretical earnings? If the answer is yes, then at least you know where the stock should trade.
So where is the stock currently trading. Again I prefer stocks that have a positive transit up through EBV-3 or as I call “Coming out of the Blue”. As I mention here in this blog, stocks that have a positive transit from EBV-3 the market is starting to form a connection to the company’s balance sheet. The market is starting to believe what is on the company’s balance sheet. So from here, at EBV-3, if the company can break even, then achieving EBV on their model price chart is relatively easy. If the company can earn their theoretical earnings then achieving EBV+2 or EBV+3 can be relatively easy. If this same company can grow their earnings and achieve faster growth then say their competitors EBV+5 is certainly very achievable.
Wait a minute you just made 490% or five times your money!
So big breath here!
I am NOT recommending RIMM. I am NOT saying RIMM is going to EBV+5. I giving you another set of questions to ask? Remember in the model price world, the world I have created different questions can be asked, with concrete targets in the form of EBV lines which you can clearly see.
Here is a thought. Why don’t you invest your money, a little at a time, as company’s transit above EBV-3? One can have a portfolio of them. Be like Buffet and never sell them. Or as they start having negative transits you can sell these positions with potential substantial gains.
Be rational how you invest. Consider risk and reward. The higher the valuation the higher the risk, translates into the higher the EBV level the higher the risk. Yes companies that are “Coming out of the Blue” are not sexy. They are broken companies coming back from the brink. The business press ignores them. They have an odor to them. Dumpster diving anyone! But more then a few of these “Coming out of the Blue” stocks will become winners again. At EBV+5 the business press will be lauding management as visionaries. Awards will be given. Mistakes will be made and the stock gets slammed. The process starts all over again.
And while I’m on a roll let’s compare Apple model price chart with that of RIMM’s.
Here is Apple’s model price chart.
Apple Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
And here is RIMM’s.
Research in Motion with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
What do you notice? Apple has had two negative transits. Apple actually had a negative transit of EBV+6 (which doesn’t show up on our chart, but it did) and this week transited down through EBV+5.
On the other hand RIMM, had a positive transit of EBV-3 back on November 25, 2012, which I blogged about here. And in the last two weeks has had two positive transits of EBV-2 and EBV-1. Yes, Apple is a better company. Yes, Apple has better products. However in the investment game this it’s about valuation NOT about how good the company and its products are. Hell, RIMM doesn’t even have a product yet!
P.S. Since my blog about RIMM on November 25, 2012 RIMM is up some 35%. I hate cheerleading. I’m about outcomes as I’ve said many times before. The good news about model price charts is they confirm to investors they are on the right track, as companies continue to transit either up or down through their EBV lines confirming investment positions in your portfolio. In other words, after transiting above EBV-3, RIMM had two more positive transits confirming the original move back on November 25th.
P.P.S. After hitting a low of $6.22 US on September 24 many investors are put off purchasing shares of RIMM at the $15 dollar level. “It’s gone up to fast”, “I will purchase shares when the BB10 is launched.”, etc. With using model price theory and charts, the higher the stock price in some circumstances the less risk investors are taking. Stocks “Coming out of the Blue” have less risk than stocks below EBV-3. Stocks that are transiting up through their EBV lines, have less risk then stocks with negative transits when investors are long. Stocks have less risk when at the bottom of their EBV zones then at the top.