Playing the Tech Dating Game

 | Feb 27, 2014 | 3:10 PM EST
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One of the charms of this business is the way perceptions change. The market falls madly in love with a stock like Apple (AAPL), then detests it a year later, proving that there's a thin line between love and hate. Then the following year, investors start wondering, "What is my old flame doing?" as they pull up a quote on the stock. It's the equivalent of checking out your ex on Facebook.

When Warren Buffett buys a company, the transaction is the equivalent of marriage" He intends to have and hold that stock forever. That's worked well for him; Buffett is obviously the marrying type. But many stocks simply aren't marriage material. Consider the market's torrid love affair with the former Research In Motion, which left a trail of broken hearts so long that that the company changed its name to BlackBerry (BBRY).

But time heals all wounds; BlackBerry is attractive now, and it's time to make a move.

BlackBerry has a slimmed-down market cap of just $5.5 billion, but thanks to a large cash position, it has an enterprise value of just $2.67 billion. It also possesses BlackBerry Messenger. Consider that Facebook (FB) just agreed to pay $19 billion for WhatsApp. Messenger has about a fifth as many users as WhatsApp, so if we use that as a rough valuation metric, Messenger alone is worth $3.8 billion.

A transaction at that price would give Blackberry a $6.63 billion position in cash and/or cash equivalents. Even if you value the remaining assets at zero, the company would be undervalued by $1.1 billion, solely based on cash and equivalents. If instead BlackBerry were to sell Messenger for just $ 2.8 billion, the company's cash and equivalents would be equal to its current market cap.

Now check out the chart, which has clearly formed a bullish inverted-head-and-shoulders pattern:

BlackBerry's 50-day moving average (blue) is about to cross above its 200-day moving average (red), which will culminate in a golden cross (shaded yellow). A fill of the June 28, 2013, gap (arrow) takes the stock to $14.25. That move represents a nearly 40% gain.

I want to make clear up front that this is a no-strings-attached relationship. This is a speculative trade, so don't expect a walk down the aisle. Instead, avoid a walk of shame by selling if the stock breaks below the bottom of the right shoulder of the pattern. Use protection in the form of a stop beneath support of $8.90.



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