Saturday, January 5, 2013

An Options Trade Opportunity in Research In Motion

Once a Nasdaq bellwether, Research In Motion (RIMM) has, over the last few years, become one of the most hated stocks in tech. Shares of the Blackberry maker hit a fresh 5-year low Tuesday at just over $24 per share and are down better than 50% on the year.

The company that once dominated the smartphone market has had a difficult time competing as of late. Apple’s (AAPL) iPhone and a whole host of devices running Google’s (GOOG) Android OS have steadily taken market share from RIMM and sales of the company’s Playbook tablet have been disappointing. RIMM has an aging product line and the delay of its Blackberry 7 smartphones likely caused the company to reduce its fiscal year 2012 EPS estimate from $7.50 to between $5.25 and $6.00. Additionally, “the lower-margin Playbook, and R&D associated with new operating systems” (S&P) will likely keep gross margins under pressure until 2014.

Despite all of this, the company is absurdly undervalued at current levels. It trades at just 4 times TTM earnings and only 3 times cash flow. Additionally, the company is debt-free. The stock rose better than 4% yesterday when the company announced the launch of 5 new touchscreen Blackberries. Although the devices are unlikely to change investors’ perception of the company in the short-term, the phones may be enough to stop the bleeding until RIMM can roll-out its QNX based smartphones in early 2012.

In any case, now could be an opportune time to start averaging-in to RIMM shares. At these levels, investors can pick up a quality company at a bargain-basement price. However, because I believe Apple and Google are better names to own long-term, I would simply get long RIMM calls. Specifically, I would buy January 2013 22.50-strike LEAPS which are asking 7.80. This way you give yourself a lot of time for the company to turn things around.

Source: S&P Stock Report: Research In Motion

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

No comments:

Post a Comment