Investing Lessons from BlackBerry
Thursday, September 26, 2013
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 36.1%, down 9.1 points
  Neutral: 33.3%, up 8.1 points
  Bearish: 30.6%, up 0.9 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »

A funny thing happened this week. As I was about to tape my “Sell of the Week” for Chuck Jaffe’s Your Money Life podcast on Monday afternoon, trading in BlackBerry Ltd. (BBRY) was halted. Since neither Chuck nor I knew what was going on right at that minute, we postponed taping. As we now know, an acquisition offer was made for the Canadian smartphone maker.

I bring this up because BlackBerry is a great case study for investors. The company realized revenue growth of 33.1% and net income growth of 38.8% in fiscal 2011. (The company’s fiscal years run from March through February.) Last week, BlackBerry warned that fiscal second-quarter revenues would be down by approximately 45% from a year prior. The company also anticipated recognizing a net operating loss of nearly $1 billion, primarily reflecting a massive writedown of inventory.

The competitive environment changed relatively quickly for BlackBerry. Just seven years ago, the company’s devices were the best way to check email away from a PC. When Apple’s (AAPL) iPhone was introduced in 2007 and the first phone to run Google’s (GOOG) Android operating system was introduced a year later, BlackBerry underestimated the threats. Yet, BlackBerry should have known better since the competitive trends were no secret. Both Motorola (MOT) and Nokia (NOK) ceded a great deal of market share after being leaders in the mobile phone market. Palm’s PDAs enjoyed great fanfare, but the company failed to leverage its goodwill into the mobile phone market.

When it comes to investing, understanding the catalysts behind the numbers is as important as the numbers themselves. If a company is riding on the success of a single product, targets a market that has shown a history of evolving trends or operates in a competitive environment, the company’s future growth may be questionable. Some companies can and do expand their product offerings, but many others fail. Corporate history is full of successful companies hurt by newer competitors.

Don’t rely on brokerage analysts to point out the threats to your portfolio, either. While I think analyst reports are useful as a sanity check and to reveal what you may have overlooked or not considered, analyst ratings are overly optimistic. Analysts, as a group, are weary of using the “sell” rating. While Zacks Investment Research does show eight analysts having a sell or a strong sell rating on BlackBerry, the research firm also tabulates 17 analysts as having hold ratings. I have no idea what improved prospects these analysts think investors should wait for, especially considering there are thousands of other stocks to choose from.

To be fair, there is an acquisition offer on the table. Fairfax Financial Holdings is intending to acquire BlackBerry for $9 per share, and BlackBerry’s board of directors has approved the terms listed in the letter of intent. But, and this is a huge but, Fairfax lacks the cash to complete the deal. Though it is working with investment banks to secure the financing, there is no guarantee that the investment firm will be able to close the transaction.

Furthermore, every proposed acquisition has a life of its own and no deal is done until it is done. This is why I suggest that any time a company you are invested in gets a takeover offer, sell following the approval by the board of directors. If the deal doesn’t go through, the share price of the targeted company could experience a sizable drop.

Perhaps the biggest lesson to learn from BlackBerry, however, is that buying and forgetting is a terrible strategy. Though there are clear benefits to limiting the number of transactions, always take the time to monitor the stocks you own and be prepared to sell if business or industry conditions change.

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The Week Ahead

Four S&P 500 member companies will report earnings next week. The schedule is Paychex (PAYX) on Monday, Walgreen (WAG) on Tuesday, Monsanto (MON) on Wednesday and Constellation Brands (STZ) on Thursday.

The week’s first economic report will be the September Chicago PMI, which will be released on Monday. Tuesday will feature the September ISM manufacturing index, September motor vehicle sales and August construction spending. The September ADP employment report will be released on Wednesday. Thursday will feature the September ISM non-manufacturing index and August factory orders. The September jobs data—including the unemployment rate and the change in nonfarm payrolls—will be released on Friday.

Federal Reserve chairman Ben Bernanke and St. Louis president James Bullard will speak on Wednesday. Minneapolis president Narayana Kocherlakota will speak on Friday.

The U.S. government’s fiscal year will end on Monday. If a budget agreement is not reached by then, some government services may not be available starting on Tuesday and until an agreement is reached.

AAII Sentiment Survey

Neutral sentiment jumped to its highest level in a month, according to the latest AAII Sentiment Survey, as large-cap stock prices fell for five consecutive days.

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged by 9.1 percentage points to 36.1%. This is a three-week low. It is also the sixth time in the past nine weeks optimism is below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, rebounded by 8.1 percentage points to 33.3%. This is ends a four-week skid and puts neutral sentiment back above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, edged 0.9 percentage points upward to 30.6%. The historical average is 30.5%.

At current levels, all three sentiment indicators are well within their typical historical ranges.

The drop in bullish sentiment and the increase in neutral sentiment occurred as both the Dow Jones industrial average and the S&P 500 fell during all five trading days of the survey’s period. The fiscal standoff in Congress likely didn’t help optimism either, though it did not necessarily cause individual investors to be bearish. Rather, the market’s rally this year, corporate earnings and economic growth are playing bigger roles in influencing sentiment. This said, several AAII members have previously expressed their frustration with Washington politics.

This week’s special question asked AAII members if they agree or disagree with the Federal Reserve Open Market Committee’s decision to leave its bond-buying program unchanged. Approximately 51% of respondents disagreed with the decision while 36% agreed with it. Those who disagreed said it is time to raise rates or are concerned about the future impact on inflation and the U.S. dollar if the monetary stimulus continues. Those who agreed thought the economy is not yet strong enough to raise interest rates. Some respondents who agreed with the Fed’s decision thought the bond purchases should start to be tapered sooner rather than later.
Here is a sampling of the responses:

  • “I disagree. The Fed is waiting too long to get its monetary policy back to normal. They won’t be able to turn it off when it’s too late.”
  • “Continuing on the present course will eventually result in stagflation and an ever-declining economy.”
  • “I agree because the economy needs to show more signs it will be able to stand on its own before the Fed cuts back.”
  • “Agree. The economy is not strong enough for the Fed to stop purchasing bonds.”

» Take the sentiment survey