Don't Be Fooled by BlackBerry

 | Aug 12, 2014 | 4:00 PM EDT
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Generally, I like to buy stocks that have dipped and corrected during an upward trend. The correction is often followed by a period of consolidation, after which the upward momentum can return.

That doesn't necessarily mean, however, that a stock that is displaying that pattern on its chart is a buy. Take a few seconds before acting on a chart signal, and confirm your view by looking at a chart with a different time span. For example, take look at the two side-by-side charts below for BlackBerry (BBRY).

BlackBerry (BBRY)
Source: VectorVest

The three-month chart on the left displays a bullish pattern. Following a rapid move up, there has been a 50% retracement, a failure to fill the gap that started the rise and a period of consolidation. When all of that is taken together, I regard it as a good sign. On the right, however, if we stretch the chart out to a three-year view, the story changes. Not to be too dramatic, but from that perspective, BlackBerry's drop over the past couple of weeks looks to have just resumed a terminal decline, and it is the previous blip that looks like a false signal.

I know that some of the bounce off of the $6 level is due to speculation about the company being bought or taken private, but the longer we go without that happening the less likely that it looks -- at least without another significant drop in price.

The mini rally during June and July was sparked by BlackBerry beating consensus estimates in the last couple of quarterly earnings reports, but a potential long-term investor should not lose sight of one basic fact: EPS in both of those quarters was still negative. Call me old fashioned, but when a once-mighty cash cow loses less money than Wall Street estimates, I don't regard it as cause for celebration.

BlackBerry has a negative levered cash flow of $1.17 billion on a trailing basis, which is not good news for a company with $2.68 billion of cash on hand and a debt-to-equity ratio of over 36. Admittedly, CEO John Chen has staunched the flow more than some expected, but the company is still bleeding cash.

Buying shares of BlackBerry on the belief that some entity will step up and buy the company is foolish. Where is the sense in stepping up now, as the company continues to lose money? Without that white knight swooping in, there is no reason to buy the stock.

The one-time leader in smartphones has shown time and again that it is behind the times, and there is no sign that that is changing. The short-term chart may look like an opportunity and some will tell you that a great product is coming or that government contracts or some other line of business can more than make up for losses in the handheld market, but don't be fooled. BlackBerry is not a buy.



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