Above The Fray

The Weirdness of RIM

In the last year, I doubt that there is another company that has been more discussed in the media than Research in Motion. The discussion has generally been both quite spirited and opinionated. It seems that everyone has a view on whether RIM will thrive, survive or die. Full disclosure here……at Stacey Muirhead, we own RIM shares on behalf of our investors. We clearly are in the “thrive” camp in our view about its prospects.  However, it is also true that we believe that we have purchased shares recently at prices that provide such a significant margin of safety that we should do okay even if the company merely muddles through from here.

But whether you are a believer in RIM or think it is destined for the scrap heap, there is much activity by RIM investors recently that is just plain weird! In the last five trading days, an astounding 374,318,025 RIM shares have changed hands on NASDAQ and the Toronto Stock Exchange. Since the day following RIM’s most recent earnings announcement on December 20th, a total of almost 900 million shares have changed hands. Given that RIM has only about 524 million shares outstanding the company has seen its entire share base turnover 1.7 times in less than thirty trading days. Is this really investing? Doesn’t this seem a little weird to you?

The steady stream of RIM upgrades and downgrades by analysts has been nothing short of supersonic. One prominent analyst has changed his rating on the company four times in the last 90 days. Can a business really change that much in any 90 day period? Is this really value added investment advice? Doesn’t this strike you as just a little weird?

The amount of short selling taking place in RIM shares has been staggering. As of year end, approximately 137 million shares had been sold short. This is up from approximately 95 million shares sold short at the end of October. While short selling is certainly a legitimate way to bet against any company, it is unusual to see over a quarter of the outstanding shares in any company sold short due to the risk of a short squeeze or a recall of the borrowed shares. I would also argue that this high short interest ratio seems particularly unusual given that RIM has cash representing almost half its market price and no debt. Does this seem a little weird to you?

While only the passage of time will establish whether we are correct about RIM or not, we think there is much current  activity in RIM shares which is just plain goofy and has nothing to do with the bedrock principles of sound long term investing. I always thought that investors attempted to analyse a company to determine its current intrinsic value.  I always thought that investors only bought shares in a company when it traded at prices significantly below its current intrinsic value in order to create a margin of safety in the event of something going wrong. Certainly that is what we have always tried to do at Stacey Muirhead.  While I won’t speak for others, I will pose the following questions. Has the intrinsic value of RIM really been changing that dramatically in the last 30 days that it was rational investment decision making which resulted in the buying and selling of almost 900 million shares? Has the intrinsic value of RIM really changed so much in the last 90 days that it was rational for an investment analyst to change his recommendation on the shares four times?  Is it rational investment decision making to sell short more than a quarter of the outstanding shares of RIM?

As Blaise Pascal, the famous French mathematician and philosopher once said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone”. While I don’t know if that is true for all of humanity, it certainly seems like a solid suggestion for RIM investors.

 

“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation.

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One Comment

  1. David Wilcox says:

    I couldn’t agree more with what you’ve written about RIM’s recent trading activity. What you’ve described reminds me of a couple great value investing quotes and Ben Graham’s “Mr. Market” parable.

    “Don’t ever think the stock market knows more than you do about the underlying business.” — Prem Watsa.

    “We weren’t our of sync with the market; the market was out of sync with reality.” — John Neff.

    Ben Graham’s Mr. Market Parable:
    “Imagine you had a partner in a private business named Mr. Market. Mr. Market, the obliging fellow that he is, shows up daily to tell you what he thinks your interest in the business is worth.

    On most days, the price he quotes is reasonable and justified by the business’s prospects. However, Mr. Market suffers from some rather incurable emotional problems; you see, he is very temperamental. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that seems to you a little short of silly. As an intelligent investor, you should not fall under Mr. Market’s influence, but rather you should learn to take advantage of him.

    The value of your interest should be determined by rationally appraising the business’s prospects, and you can happily sell when Mr. Market quotes you a ridiculously high price and buy when he quotes you an absurdly low price. The best part of your association with Mr. Market is that he does not care how many times you take advantage of him. No matter how many times you saddle him with losses or rob him of gains, he will arrive the next day ready to do business with you again.” — Ben Graham.