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Blackberry Resuscitated?

Richard Croft
February 28, 2014
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It’s not often you see a company rally despite declining earnings, especially a company that is in the process of overhauling its business model! Nonetheless, that that is exactly what is happening with Blackberry under the guidance of recently appointed CEO John Chen.

Blackberry continues to fall short on earnings no matter how much management tries to manage expectations, and that is likely to continue for at least the next few quarters. Fortunately for Mr. Chen that does not seem to be impacting its’ share price as investors are no longer judging the company on its hardware business. The current focus is on Blackberry’s BBM mobile messaging software.

The company is trying to rebrand itself as a developer of messaging apps for the Android and iPhone markets. Its’ latest and most intriguing apps are the BBM Voice, BBM Channels and BBM voice notes.

The objective is to engage users to share content via BBM as a VoIP (voice over internet protocol) service. If there is a successful uptake by users, then Blackberry can turn its attention to monetizing the service. At this stage, Mr. Chen is getting a pass as he tries to guide a much leaner company through uncharted territory.

The company’s shift has attracted the attention of some large players, most notably activist investor Dan Loeb, who manages the Third Point LLC hedge fund. Like the rest of the market, he is giving the company some wiggle room but eventually will probably want management to spin off BBM as a separate company.

Complicating matters was the recent resignation of Andrew Bocking, who was the executive in charge of BlackBerry’s BBM. That may have been late stage housekeeping, as Mr. Bocking was a key player under the Thorsten Heins administration. Like most new leaders, Mr. Chen will want to put into key positions his own team, but it does raise the level of uncertainty which may well shorten Blackberry’s honeymoon period.

In my mind, this is a last gasp from a great Canadian company. I hope it works, but a lot of things will have to fall into place before shareholders will see any real profits from this division. At some point, BBM will have to produce real earnings or the momentum that is currently driving up the shares will be lost.

If you want to bet on BBM you can buy the stock, but given the real possibility that the company will not produce much in the way of earnings for the next few quarters, you would be buying on the basis that the market will continue to cut the company some slack.

As such, you might think about writing covered calls as the premium on Blackberry options are in the top quartile of all Canadian options. At least you can generate some cash flow while you wait for the BBM saga to unfold.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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