A Canadian on Wall Street

With the amount of hoopla surrounding Apple’s foray into the smartphone market, and the subsequent hit to its potential new competitors, it’s got me thinking once again about shorting the only real Canadian contender in that arena, Research in Motion.

I have a friend who was burned quite badly by RIM in late 2003, around the time the stock was trading in the pre-split $45 dollar range. He had lulled himself into believing that the stock was predictable and that it moved in smooth gradations back and forth, and he profited from the minor ups and downs. Then, RIM did what it’s done quite a few times since, and announced the first of many monster quarters, where it defied all estimates. My friend had a massive, leveraged short on RIM at the time, not unlike many daytraders who try to maximize the reward (and also the risk, as in this case) gleaned from the small, everyday fluctuations of a stock, the fluctuations that Benjamin Graham always attributed to Mr. Market’s schizophrenic nature. That blew up his portfolio and taught me about RIM’s super volatility.

Still, in 2007 RIM does seem a touch pricey, but pricey enough to warrant a short, or a LEAP put? At a P/E of nearly 70, it’s certainly not a value stock, but they have a serious lock on the enterprise email segment through partnerships and being first-mover. (Or at least, first successful mover — Infowave was in the market at the same time but did not have the killer Blackberry hardware and a true “push” email link with Microsoft Exchange Server, the backend to the ubiquitous Outlook; I was an investor in IW and watched as my “value” purchase of the stock at around the $30 market, after a major fall from triple digits, turned into a literal (ha’)penny stock.) There was some news about competitors in the past, including Nokia, but I suspect it’s no longer strictly technology that can put a crimp in RIM’s hold on that market as much as better deal-making on the part of their competitors.

To keep their growth alive, RIM put out the Blackberry Pearl not that long ago, its great hope in the smartphone wars. It’s questionable to me how big the smartphone market is, though. Analysts bandy about numbers, but what it comes down to is whether or not the majority of people really want to have all-in-one devices. It seems strange to see us creeping back in on this concept of convergence which was so popular in the late 90s, but which died an ignominous death in the tech blow-up of 2000. The new iPhone (or whatever it may end up being called, if the Cisco lawsuit is more than sabre-rattling) is certainly a stylish addition to the space, but again, how many people want a combination camera, music player, cellphone, PDA? There’s a solid, hardcore gadget-fan population that will buy that kind of thing before they eat breakfast, but in terms of everyday use, most users will view that as overkill. How far does the Apple sheen go, anyhow? (Steve Jobs was also the guy behind NeXT, so it’s not like he’s completely infallible.) Will RIM’s solid but sort of pedestrian Pearl, with its current availability — a la the XBox 360 versus the PS3 — and cheaper price point, be affected as greatly as some people seem to think? And is the smartphone market as big as either of these players, RIM or Apple (or Motorola and Palm) seem to think? I suspect that there’s a kind of “smartphone aura” that’s injected a bubbly premium into these stocks.

With that said, though… who’s really brave enough to short RIM? My view of shorting, learned from some experience, is that it’s really not a great idea to short a company’s stock unless you think that company is going to go bankrupt or that it is so spectacularly mismanaged and problematic that it may as well. It helps, too, if the company is in a dying or dead industry, to add that extra oomph. Does RIM fall into that category? Not really, so for me I’d likely employ a long-term put if I wanted to participate in any “return to earth”, but even then I find RIM has been so completely unpredictable in the past that I’d rather just avoid it for now. Those folks who shorted RIM in early 2006 at $85 would have had a pretty hard time predicting that after all that patent litigation cleared up, the stock would climb as much as it did, and I’m sure more than just my friend’s shirt has been lost trying to tame this beast.