Lagging domestic sales. Increased competition. It seems everyone is piling on the anti-Research in Motion bandwagon these days. But a cursory look at the balance sheet shows a company in outstanding financial shape, and still a leader in an industry that is still growing by leaps and bounds. While the market capitalization of RIM has fallen to under $15 billion, it sales have more than tripled, to just under $20 billion, since 2008. Is RIM a value trap, or is it now exactly the kind of company Warren Buffett would say that the famous “Mr. Market” of Ben Graham’s The Intelligent Investor is advertising at a rock-bottom, get-it-while-it-lasts sale price?
Josh Brown, a New York City-based financial advisor at Fusion Analytics, wonders the same thing. In his excellent site The Reformed Broker Josh imagined a conversation between himself and The Oracle of Omaha, in which he pitches the merits of RIM stock.
Pitching RIM to Warren Buffett
by Joshua Brown
The following is a fictitious conversation between myself and Warren Buffett using only his actual quotes. I have sourced these quotes where possible. Enjoy!
Omigod omigod omigod, it’s actually ringing! OK, Josh, be cool. Be calm. Be, well, be YOU, you can do this…
Warren Buffett: Hello?
Josh Brown: Hello Warren, this is Josh Brown. You know, from Twitter…
WB: This is who now?
JB: Sorry, my name is Josh Brown, I’m a money manager in New York City. You might know me from such shows as Fast Money and Breakout! with Matt Nesto and Jeff Macke.
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WB: Yeah, no. What can I do for you, Josh?
JB: I’ll only take a moment of your time, sir – and it’s an honor. I wanted to ask you what you thought about Research In Motion, the stock’s down almost 80% from its high and I’m wondering if there might be some value there worth exploring...
WB: Technology is outside our circle of competence. Some types of businesses like most technology businesses change too fast to be predictable. Generally we buy businesses that we think will be the same 10 years from now. (2006 Annual Meeting)
JB: I know that, but I have to point out that many of your investments are really technology investments. Technology is what’s allowed the railroads like your BNI maintain competitive dominance in the transport industry. And your most recent investment into Mastercard was a tech investment, that’s an electronic payments processor, not a “financial” in the traditional sense. And I won’t bring up the Chinese car battery company, I know that one still smarts. So can’t we look at Research In Motion objectively for a moment without classification?
WB: Fine, proceed Josh.
JB: Okay, so here’s what the market knows so far – between Apple’s iPhone and all the Google Android phones, RIM is basically doomed to see its BlackBerry lose share forever. They’re now down to only 12% of the smartphone market and their Playbook tablet attempt was as embarrassing as your soap opera appearances. The stock has now been priced as though there’s no future for the brand and all the excitement can only happen elsewhere in the smartphone game.
WB: Investors should remember that excitement and expenses are their enemies…they should try to be fearful when others are greedy and greedy when others are fearful. (2004 Chairman’s Letter)
JB: Exactly, and the RIMM shareholder base is filled with fear right now. The company had an $80 billion market cap in the summer of ’08, now its more like $14 billion!
WB: Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. (2008 Chairman’s Letter)
JB: I know, and this is a Kriggedy-Krazy markdown, Warchest!
WB: Don’t call me ‘Warchest’.
JB: Sorry. Warren, er – Mr. Buffett. And it’s not like the business isn’t up and running. The company may be losing share but they still have a huge subscriber base…
WB: I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will. (Panel discussion at I.O.U.S.A. film premiere)
JB: And that brings me to my next point. There are idiots running it, two of them. But you have to give the co-managers some credit, they’ve grown the business for the last decade getting it to where it is now.
WB: Announcements regularly sing the praises of CEOs who have, say, quadrupled earnings of their widget company during their reign – with no one examining whether this gain was attributable simply to many years of retained earnings and the workings of compound interest. (1985 shareholders letter)
JB: In this case, management was first and best for a long time, and then Apple crashed the smartphone party. And now, dare I say it, the stock may finally be cheap. It’s trading at 4.7 times next year’s earnings expectations, what if it earns anywhere near there in 2012?
WB: A girl in a convertible is worth five in the phonebook. (2000 Chairman’s Letter)
JB: I hear ya, those are just estimates and they are not booked profits. But you know there is still a takeover possibility. Microsoft could get RIM and its subs extremely cheap as their entree into wireless. Bloomberg says that RIM “has lost so much value that an acquirer could pay a 50 percent premium and still buy the BlackBerry maker for a lower multiple than any company in the industry.”
WB: The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer. (1990 Letter to Shareholders)
JB: Exactly, and as if that weren’t enough, every analyst on The Street is now negative, RIM has been downgraded across the board, not a positive forecast in sight.
WB: We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. (1992 Chairman’s Letter)
JB: So we’re on the same page. I’ll tell you what, start with me on just 5 million shares at around 28, keeping buying power in reserve for a successful retest of the year lows. Give me the next 6 months with this position, trading at a fraction of its value just this winter and I’m telling you, I’ll be your number one broker come Christmas time.
WB: Sounds good, kid. But you’re forgetting one thing…
JB: What’s that?
WB: As I said, I don’t buy tech stocks.
Josh Brown is a regular contributer to The Wall St. Journal, Forbes, CNN Money, Christian Science Monitor and CNBC. The Reformed Broker is a blog is about markets, politics, economics, media, culture and finance.
You can view Josh’s original post HERE