RIMM Could Be a Cautious Buy

 | Dec 14, 2011 | 11:00 AM EST  | Comments
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All the great contributors tap their cabal for stock ideas, and I do this often as well.

There is nothing like asking smart people what their single best idea is at any moment. The answers can sometimes surprise you and often lead to satisfactory returns. Last night, I went trolling for ideas among a group of very smart people when I attended the 80th anniversary celebration of the CFA Society of Los Angeles. I ran into a friend who is an extremely sharp analyst for a quality growth boutique with a couple billion under management. His nom de plume is Cliff the Swan and one of Cliff's specialties is understanding fat-tail risks and avoiding those black swan events that can blow up a portfolio. He looks for names with characteristics that limit the downside risk. You can imagine my surprise when he told me his top-of-mind idea is Research In Motion (RIMM).

I have been wrong with a capital "W" on RIMM. In March 2009, I put on a smartphone bet and bought RIMM and Apple (AAPL). And the RIMM bet worked for a couple years. This year the stock has been destroyed as they lost market share and bet big on the playbook, which is going nowhere. Although I still hold my now-smaller position, I cannot pound the table for anyone to buy more.

Into this context came Cliff, telling me he is buying RIMM at $16. His thesis is that the downside is protected by a $14 liquidation value and there can be some upside when the company gets through the product transition to the QNX operating system. I always question liquidation values for technology companies, because they never get liquidated. But the analysis could provide an anchor for a worst-case buyout price. The company has a couple bucks in cash per share and the receivables and inventory add another $5, depending on how much of a discount you give those line items.

The swing factor is the value of the patent portfolio. RIMM does own considerable IP, for instance in the back-end security that makes it still the first choice for corporate smartphones. Cliff estimates the IP value at $7, thus putting his downside floor at $14.

We both agreed that RIMM is going through a classic 1990s-style product transition, the type that used to blow up tech companies on a regular basis back in that fast-growth era. There is no doubt that Apple and Android will dominate the smartphone market, but RIMM can remain a player if it can offer a good enough handset experience that rivals Android, while also providing the security and keyboard features that capture its fans today.  For more than a decade, the Street has called the imminent demise of RIMM, only to be wrong.

I do not think RIMM will ever again dominate the smartphone space, that is now Apple's game to lose, but with a decent product they should be able to stabilize their market share. Cliff wouldn't put a price target on RIMM, because the upside truly is unknown, but with limited downside he was willing to place the bet.

I am still in RIMM and will hold at this point. If you package a speculation in RIMM now with owning Apple and/or Google (GOOG), you have a pretty good package bet on the smartphone market, which is still one of the best opportunities in the tech space today.

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