Hey everyone, I’d like to get your feedback on a report I wrote last month:
http://www.scribd.com/doc/119507200/Research-in-Motion-RIMM-The-Bear-Case
It’s kind of an ER report, but based more on short term price catalysts, and thus is light on fundamentals and projections.
Any input you guys have regarding any aspect of the write-up would be much appreciated!
I skimmed it and liked what I read, but I’m suffering from confirmation bias. I strongly dislike RIM.
I would have added that their phones suck and people hate them.
I looked at this report for five minutes and here are my thoughts:
(1) You should start with your recommendation upfront. It really wasn’t very clear. Provide a few bullets underpinning your investment thesis, what you think is misunderstood about the current investor base and the catalysts that make your short work.
(2) Most of what you talk about is retrospective, and therefore should be priced into the stock. You’re really reporting too much on what happened and not providing much of an actionable recommendation, and only really touch upon your forecasts later in the report.
(3) I’d be really curious to hear what aspects of field research you’ve done to give you confidence in finding things that aren’t already priced in. The fact that the large majority of analysts covering this already have Hold ratings suggest that there are a lot of people pretty bearish at the moment. Sell-side doesn’t go neutral on companies they believe in. So what experts in the field have you spoken with and what analysis of competitors/consumers/different areas of the value chain make your call somewhat differentiated? Your reader would appreciate if you had more original insights based on specific research you’ve done in the field – may be harder for you since you aren’t employed by a fund, but you can still be resourceful and try to look people up on LinkedIn or alumni network, or just go to stores and talk to sales reps to understand selling trends and potential new product launches.
(4) RIMM continues to trade a lot on valuation so would have appreciated a discussion regarding peak/trough earnings power and peak/trough valuation.
(5) How much more downside does this stock have to achieve its bear case and what kind of floor does a potential takeout provide? How do you value its assets, both tangible and intangible?
This is an OK report but really isn’t actionable enough, and focuses too much on background and not enough on a recommendation. While this may be more acceptable to sell-siders, a good sell-side note still provides an actionable investment idea and a clear thesis, and buy-side notes are even more action oriented. I have worked with people on their research reports in the past and I can say that while you understand the company at a high level, you need to be much more clear about your recommendation and convey a better understanding of what actually moves the stock. Also it would help you to take a more defined stance on downside/upside with greater originality of insights.
Anyway, having worked on both the sell-side and buy-side (now at a long/short equity fund), those are my two cents. Hope they help.
^Respectx20
Thanks for the comments guys.
numi,
Very helpful insight on your part. The formatting and structure of my write-up leaves a lot to be desired for sure, I initially intended it to be a few pages long but it morphed into something halfway to an ER report. Next time I will take context, structure and readability into better account.
In terms of field research, I honestly don’t know of any one thing in addition to what I already know that would assist me in making a more informed call. I understand that field research is common in the industry, but from where I’m sitting I think I can omit anything I don’t find pertinent to the call. I don’t have higher ups to impress with a bunch of numbers, statistics and insider opinions of no real value other than ornamental. This is an unusual case where the outcome is pretty binary in my opinion, and by the time fundamentals come into view, RIM is at $30 or $8 - with the position pertaining to this call being covered.
You’re definitely right about my call being undifferentiated, as the street is still bearish on the stock. As always, analysts were late in calling this one, but the market isn’t always wrong, just some of the time. Each situation is different, but the opportunity I see here was simple overzealous speculative buyers driving the price up due specifically to the hope for BB10. And that’s the one specific catalyst that will determine whether this stock is in the twenties or thirties, or at single digits by mid year. So if I’m wrong, Ill get blown out of the water no doubt, but it will be because I underestimated BB10. If I’m right - it will be because the market will start to view RIM as a restructuring play. Everything else is secondary right now in my view, so why spend 3x more time for no more alpha, the sell siders can value the patents better than I can, the only thing I care about is that those patents didn’t stop it from trading in the $6’s. We might disagree in this particular case, but in general your points 3-5 are a must have in a report, and I’ll certainly keep a note on that.
Good point on the not-actionable enough part. I should have laid out the sell opinion much more clearly and stuck my head out. I think I was way too vague there. All in all I there’s a whole lot of room for improvement, and hopefully I can address the shortcomings you laid out in my next report. Really helpful and informative post.
I’m definitely saving it for reference, thanks for spending some time and helping me out man, I really appreciate it.
you’re welcome, my pleasure to help
RIMM up 10% on the day to $17.68. Any updates to your bear/short thesis? What do you make of today’s development?
Interesting article here --> http://www.valuewalk.com/2013/01/research-in-motion-limited-usa-nasdaqrimm-pt-boosted-to-19-50/
How heavily weighted is channel checks and other market research that you’ve suggested in this thread in the final thesis? It seems to me you’d get a lot of noise, depending on the scope of the company. But it always seems like people recommend this.
I think channel checks are very important, especially in sectors such as retail and technology. I use the word “channel check” fairly broadly though; in other cases I mean speaking with different people in areas of the value chain. For example, if a company you’re following says their sales are growing like a weed but Competitor A says they’re taking share from that company, or a supplier to the company says that demand for components is decreasing, it tells you there’s an inconsistency in the story and it’s likely that the picture isn’t as rosy as you once thought. I think understanding the picture of an industry is really important insofar as figuring out what part of the cycle you’re in, and also whether management for a particular company may be overconfident in its potential results.
It was actually up 10% yesterday on the Canadian exchange. The blip up today in the US is to catch up for yesterday’s holiday. I wonder if it gapped up or there was an arbitrage opportunity.
As former trader said, Tuesday’s run up was a catch up to RIM’s TSX listing.
The recent run up doesn’t really affect my thesis any more than the 20+% plunge after their most recent earnings - it’s all just noise at the moment. Volatility should be expected for the mid term.
I took a look at the article and the first thing it mentions is Peter Misek’s PT revision. He’s basically following the stock price at this point. While he’s a good analyst and I give him credit for his underperform call and $5 PT on June 29th, 2012 - his history of PT revisions last year has mostly followed the price up or down. Misek has missedthe vast majority of RIM’s recent run up: on Nov 20 he raised PT to 10 from 5, when the stock was at $9.59. On Dec 21 he revised to $13 from $10, the stock now traded at $14.12. Now with the stock at $18 he raises to $19.50. I don’t blame him, he’s a good analyst and its really not their job to be accurate with their price targets, as some would suggest.
The fact that they mention RIM offering it’s services for use on other platforms as a ‘wild card’ is very strange. Everyone who knows anything about RIM generally believes that’s the best option for the company if BB10 fails. I even explicitly mention it in my report. The very well known fact the management is planning contingencies and slowly restructuring RIM into a service oriented company isn’t going to ‘shake the generally accepted bet investors are making on the company’ as the article states. In fact,in my view, management is much less optimistic about BB10 than the unfounded 20-30% probability of success analysts like Misek are maintaining. Management is therefore doing the prudent thing and planning for the likely restructuring scenario.
Heins mentioned a few days ago that they might look at selling their manufacturing assets and licensing BB10. They dont make anything on their hardware, and with the coming influx of commodity manufacturers from China you have to be extremely optimistic that they recieve anything near book value for their manufacturing operations. Licensing BB10 won’t be guaranteed cash cow. Android is free, then you have Mozilla creating an OS, you have WebOS, Windows phone, and an OS being developed by Samsung and Intel, plus a few OS’s that I’m forgetting. This is going to be a tough market.
In terms of its BB10 devices, all signs point to them being on par technically with everything on the market. But people are forgetting that nobody buys based on logic, its an emotionally driven decision. And BB10 just doesnt have an identity that I think will appeal to consumers. The BB10 phones are on par now, but are mere months away from being a generation behind. Apple will release a large screen and mini Iphone this year with iOS 7, Sony seems to be back in the game with great intent and potential, and Google’s X phone and the galaxy 4 will be out by mid year running Android Lime Pie.
I honestly think the market in the last few days has been mistaking funeral arrangements for a party. I wasn’t comfortable going with an outright short thesis at 13-14 bucks, but I think now is the time to load the boat, and increase short positions even more if it hits the 20’s in the next few weeks. I see the stock at 8$ by summer.
Your rationale for your long-term investment thesis makes sense and is well thought out. However, the recent stock action also reflects just how important it is to be attentive to valuation and timing of a short as I noted in point #4. As of your report launch date versus today, you would have lost 24.5% in the span of a month if you had taken a short position (I know your report was precisely titled “the bear case” but the implied action would have been to short the stock). The stock’s movement YTD would have decimated a concentrated fund (especially with the overall markets UP 5-6% YTD), and even a more diversified fund without proper risk parameters would be in real trouble.
You can also look at the trade generating a 27% return in 6 trading days after the report was published. But thats never how you should interpret a thesis. Movement of 24,5% in a month is standard fare for a stock with well over 20% SI and facing a highly binary outcome within about 2 quarters.
In terms of looking at valuation, it really plays no part at this point. By the time valuation comes into play the binary outcome on which the thesis was based on would have been decided.
There is no fund with even an ounce of credibility that would let itself be decimated by a 24.5% move in such an extremely volatile stock. In terms of the market being up, this would generally help matters unless you’re talking about a short equity fund.
You’re right about timing being important, in fact I would argue its just as important as the call itself. The market will stay irrational longer than you can stay solvent. Alot of great calls have resulted in huge losses simply due to timing. But its unrealistic to time anything regarding RIM at this point within a month or two, in fact its actually impossible. No amount of technical analysis, astrology, or staring intently at your cereal bowl in the morning (ala Tom Demark on AAPL) is going to change that fact.
Thanks for the follow-up. If you say valuation doesn’t matter right now, why recommend going bear on RIMM when you did and what exactly has changed? Also, how does valuation not matter to a call even if it’s binary? Maybe we just think about investing differently, but in my opinion, valuation should be part of your assessment of risk/reward for any position you’re taking regardless of whether a binary hard catalyst exists. I sit across from a healthcare analyst that covers biotechs (which I also used to cover) and he would also tell you that while valuation is an inexact science, it does matter insofar as how you size your positions and your exit/entry.
Also, I know that one can’t time the market, and my views and thoughts aren’t predicated on market timing either. Even assuming that we didn’t know what happened with RIMM over the last month, were you convinced that the risk/reward profile was somehow asymmetric to the short? Personally, I didn’t pick this up when I was reading your report, but I think this stuff matters because I would struggle to get comfortable shorting a stock with that much volatility and momentum players involved in the absence of having a clear view of the risk/reward profile.
Regarding your point about “no fund with even an ounce of credibility that would let itself be decimated by a 24.5% move in such an extremely volatile stock” --> First, I specifically noted that this was for a concentrated fund; secondly, irrespective of fund size, I can tell you for sure that having to explain that type of move on a short to one’s portfolio manager would not be a conversation that I or any of my colleagues/peers would want to have. That “alot of great calls have resulted in huge losses simply due to timing” just speaks of inadequate risk management in my view. But in any case, in the spirit of being more constructive, now that RIMM’s days to cover is in the low single digits, would you double down on your short bet?
Curious to hear your follow-up thoughts and thanks for the discussion. BTW, just want to say I’m not trying to be argumentative or present an opposing case for the sake of it – just always interested in hearing different people’s investment perspectives.
I’m enjoying our discussion as well, numi. Putting things into words makes you ask tougher questions, and in fact I would prefer to hear the opposite opinion, I’m always trying my best to poke holes in my own arguments by reading and soliciting opinions opposite to mine, so if you’ve got any criticisms/questions/counter arguments, please throw them my way. In this field if you can’t change your mind you get blown out of the water.
In terms of valuation not mattering for a binary call, what cash flow assumptions are you going to input? Things are so uncertain right now that a DCF is bound to be toilet paper within a few months. You could do a probability weighted DCF, but there is no real sense of what a restructured and service focused RIM might look like, management doesn’t even know - the value would then be totally arbitrary. You could input reasonable FCF assumptions for a successful BB10 launch, okay, but what probability do you assign? 20-30% for that scenario as Peter Misek suggests in my view is extraordinarily high. Then you get buyout value, most estimates I see are $5-7, but you know they won’t want to sell for that and will give restructuring into the IBM business model a go. So generally any valuation right now won’t be accurate, there is just too much uncertainty.
What I see is that the stock has tripled in a few months. I can’t ascribe this to anything but the upcoming BB10 launch, there is literally nothing else in terms of news that has come out that would lead to this type of price action. People didn’t wake up one morning and realize the RIM has valuable patents, they knew that at $6, they knew that RIM has a large sub base of 80MM at $6, they pretty much knew everything about the company at $6 that they know today at $17, except the details and launch date of BB10. If BB10 fails, there is literally nothing to stop RIM from sliding into the single digits, I doubt that all of sudden the speculative buyers will turn into value investors and start assessing RIM’s balance sheet and patent portfolio and realize that they were wrong to knock the stock into the single digits a few months ago. Most likely that won’t be the case, most likely these guys will run for the exits as fast as possible bidding RIM’s stock back into the single digits and overdoing things from a fundamental perspective, THEN valuation becomes the tool to use and base your thesis on, but by then you’ve covered your short based on my binary thesis and are reassessing the situation with a clean slate. The reverse case is also true, if my call is a bust, you cover your short at a loss, and take a look at fundamentals, by then you can compile a half decent model knowing RIM’s business plan for the medium and long term, sprinkle it with a bunch of arbitrary assumptions, format it to look pretty and show you’ve done a lot of work to impress a boss who wouldn’t know alpha if it fell into his morning coffee, and you’re set!! 
The healthcare analyst is right, valuation is the basis for almost all investment (not trading) decisions, and the speculative buyers are betting BB10 will lead to higher CF’s and thus higher valuation, the underlying force of any asset market is the valuation of an assets cash flows (or the CF’s it has a hand in creating). In the case of RIM, we know valuation will be substantially higher if BB10 takes off, and substantially lower if it doesn’t. More accurate valuation, as I mentioned before, will be performed once the dust settles.
My risk/reward profile is based on this: I think there is a 5-10% chance that BB10 succeeds; it’s a good bet even if potential share price appreciation is substantially higher in percentage terms than the potential price depreciation.
In summary, I am calling RIM a screaming short at these levels, and would advise increasing positions if it goes above 20-21$ in the next few weeks. I see RIM in single digits by the middle of the year.
Hopefully this rather long post made my rationale a little bit clearer, sorry for such a long diatribe.