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April 30 2011  / Stock - Research In Motion
What Next For RIM

Introduction

 

If one thing stands out about RIM it has to be the folly of following analysts. Every dip since May 2007 has brought out buy recommendations from analysts both in the US and Canada as well as world wide. In May 2007 when the stock was around 65 analysts called for the stock to go to $80.00. At $80.00 they called for it to go to $100.00. At $100.00 they called for it to go to $120.00. The trend among analysts just continued. But do you notice something missing from all these recommendations? Where is the sell call? What about a stop loss strategy? Even in June 2008 at $150.00 many analysts were calling RIM stock a buy and a "strong buy".

 

Since the most recent bear market collapse, analysts still have called the stock a buy. At the market bottom in Oct-Nov 2008 and again in Feb - March 2009 where were all the "buy RIM now" calls? On Friday when Research In Motion warned investors that the next quarters earnings would not meet expectations, the stock collapsed another 14%. Analysts downgraded the stock and set a range of $55 to $80 on the upside. I thought one of the more interesting comments came from National Bank Financial analyst Kris Thompson who said he is "throwing in the towel for now".

 

So why did so many analysts get drawn into RIM along with so many investors? Looking at the chart below, the answer is pretty obvious - earnings. Rims earnings have moved up quarter after quarter. They have always produced decent numbers. Yet since the market crash the stock has struggled and cannot regain any real sustained upward momentum. 

 

This is also why I feel it is important to monitor a number of charts, and not just earnings. You can now understand that even with great earnings, the perception among many investors and much of the media was that RIM was in trouble and this has been the deciding factor. For more than a year the media has droned on and on about Research In Motion losing market share, their Playbook problems, lack of focus, lack of cutting edge products and so much more. But earnings kept coming in better with each quarter and yet RIMM stock refused to regain an uptrend momentum.

Next came all the analysts pointing out the low price to earnings ratio. But I have seen stocks with excellent earnings continue to fall with incredibly low price to earnings ratio.

Finally a lot of blame has to fall on Research In Motion directors themselves. It is almost as if they are unaware of what is going on in their own market place.

One thing to consider from the above chart is that during the most recent bear market the stock collapsed from a high of $150.00 on June 19 2007  to $44.23 on Dec 23 2008. That is a loss of 70.5% which is why I don't believe that only some stocks fall in bear markets. In bear markets it is a rare event when a stock does not follow the trend lower. Meanwhile today it would appear obvious that RIM can easily fall to $35.00 once it breaks long term support.

 

Next tip, could my Early Warning Tools To Spot A Collapsing Stock have helped this year on Research In Motion stock? Let's have a look. The chart below is pretty clear. Almost the entire year an investor would have been in the stock only during a few up trends. Notice how two upturns were not confirmed by MACD. MACD is Moving Average Convergence Divergence. You can read more in the above link on early warning tools. So while not perfect, the early warning tools would have done a good job of keeping an investor out of most of the stock declines.


WHERE COULD THE NEXT MOVE BE FOR RIM STOCK? (RIMM stock in the USA)

In an article I wrote on April 4 2011 I indicated there was no real bottom yet in Research In Motion stock. So after Friday's collapse where does this leave research motion stock now. Finally a bottom? The RIM stock chart for 5 years below might give a clue. $45.00 has seen a lot of support over 5 years. This means when the stock falls below $45.00 there could be a lot of support or if there is big volume, then a lot of investors giving up. With the present earnings and the outlook on RIM for future earnings, my vote is that we are at support on Friday. Probably a short bounce and then a sideways motion leading up to the next earnings. From there I will have to reassess. Meanwhile if the stock falls easily below $45.00 then the next $10.00 drop to $35.00 is probably going to be easy. This is not a stock to buy, but only to trade or for those investors who do options.

 

But this chart also tells me a few other important things. $58.00 is now probably strong resistance for any move higher. Many investors who have been holding for a lot of years are going to be worried on RIM after the collapse of the past few sessions and the shaky outlook for the future. This means that possibly quite a few will be looking to get out of RIM on any reasonably good bounce. I would think those who bought in 2006 and early 2007 before the stock had a major rise AND DID NOT SELL on the big move up, will be looking to get out in the next move up.

 

 

SUMMARY

So I believe RIM may have bottomed here and may bounce a bit and go sideways to down leading up to the next earnings. Then its time for a reassessment. If the next earnings are even worse than forecast by RIM, the stock will probably fall below $35.00. In the short term it will probably break the $45.00 strike.

 

At this stage I have little interest in continuing to sell naked puts. Why risk being assigned in any further meltdown? It is far more prudent to wait until the stock proves it can hold at this level before considering selling puts again. There are just so many stocks and investing is not a game or a race, but should be treated like a business. That means when the stock doesn't meet my criteria, then I set it aside on the watch list and wait. There is always another day.

 

But with RIM the investing can continue, but not selling puts. Instead selling naked calls as long as premiums warrant it, will be my choice. Many investors and analysts worry about selling naked calls. Why? The stock rising is what any investor would want. For example, let's say I sold the June $58.00 strike and for some reason the stock took off and worked its way to $59.00. If the chart's show a nice uptrend, I would buy stock and turn it into a covered call. It's a pretty simple strategy. Yet investors fear a runaway stock. Again they shouldn't do a strategy they are uncomfortable with. If their fear is the stock will run up past their naked call then don't do calls. For me when I sell a call, I know why I would turn it into a covered call and at what price.

 

The best time to sell naked calls is when a stock becomes like RIM, in a downtrend and "unloved". Right now I am holding 5 June $58 calls. Previously I was holding May $58 calls which I bought to close on Friday with the downturn. Looking at the above chart, it's obvious why I am selling the $58 strike. I believe it is at the top of the long term range for RIM.

 

I have written many times all over my site that it is important for my investing to have confidence in my charts and the stocks I follow. It is this confidence that lets me easily make decisions and take advantage of opportunities and Friday was an excellent opportunity to close my May calls early. Now it's just a matter of when to close the June $58 calls.

 

Research In Motion is far from a dead stock. They have a mountain of cash, very little debt and a widely used product. But shareholders have been hurt by what I believe is the wrong approach to investing in RIM. I do not believe RIM is a buy and hold stock by any stretch. Selling options against RIM is a far better strategy. You can check out my RIM trade here. At this point I have made $24,500.00 on RIM and earned double digits annually. Presently I am selling 5 calls at $58 for a capital cost of 29,000.00 if assigned. This means I have less than 5000.00 of my own capital in RIM. As long as volatility holds up I can continue selling options for decent premiums. If that volatility should end I will have to say goodbye to Research In Motion.

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Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. Fullyinformed.com is a private website. Everything presented and discussed are the author's ideas and opinions only.
By using this site, you agree to be bound by its terms of use. The full terms of use can be read here. If you do not agree to the terms of use, do not use this site. The author of fullyinformed.com assumes no liability for topics and ideas discussed, errors and omissions, ads and their content and external links. Any corporate insignia used are registered trademarks of their respective company or corporation and are being used for identification purposes only. All material copyrighted by FullyInformed.com. Reproduction in whole or in part prohibited. Copyright 2008

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