Tuesday, November 30, 2010

RIMM surges on Jefferies upgrade

Shares of RIMM surged 4.81% today to close at US$61.83.  Intra-day, the shares were up as much as 6.63% to US$62.90.  The big move up was due to Jefferies and Co. analyst Peter Misek upgrading RIMM from a "hold" to a "buy", and raising his target price dramatically from US$55 to US$80.

Misek cited three reasons for his upgrade: QNX OS being better and available earlier than expected, strong international sales and slower enterprise share loss than expected.

Two of the reasons that Misek cited for his optimism on RIMM (the merits of QNX OS and strong international sales) were also stated in my Nov. 14 article 5 Reasons to Buy RIMM Now.  Since that article was published on Nov. 14, RIMM has risen 5.15%.

Misek's 45% hike to his target price on RIMM is contrary to many other analysts on the Street.  In recent weeks, analysts have been hiking their EPS estimates on RIMM due to expected sales of the PlayBook.  However, the rising EPS estimates have not resulted in increased target prices or ratings.

In fact, Stifel Nicolaus cut its rating on RIMM from a "buy" to a "hold" on Nov. 17, and Kaufman Bros. did the same on Nov. 9.  Peter Misek deserves credit for seeing past the media and the tech community's obsession with Android's growth, in order to realize the multi-tasking, performance and reliability of the QNX OS.

Monday, November 29, 2010

Markets continue to fall on Ireland, Portugal and Spain

North American markets continued to fall on Monday, as investors continued to remain worried about the sovereign debt crisis in Europe. The S&P 500 was down 0.14 points to 1,187.76, while the Dow fell 39.51 points to 11,052.49. Last week, North American markets were also down on contagion fears, despite encouraging employment and GDP data from the US. For the week, the S&P 500 fell 0.86%, while the Dow dropped 1%.

Despite Ireland having agreed to a bailout package, and the EU today agreeing on a $85 billion euro package, it is obvious the euro zone situation is far from over. The details of the Ireland package still needs to be decided, and the coalition Irish government could be facing an election at any time. In addition, investors believe that after Ireland is successfully bailed out, Portugal will be next. This process could take several weeks to play out. 

Finally, Spain could also require a bailout. Despite the Spanish Prime Minister stating adamantly on Friday that his nation does not need to be rescued, investors are showing that they believe otherwise, pushing the spread on Spanish government bonds to record highs. Since Spain's economy is 70% larger than Greece, Ireland and Portugal combined, the $440 billion euro EFSF is adequate for a bailout of Spain.

Looking ahead to this week

With the sovereign debt crisis in Ireland, Portugal and Spain expected to drag on longer, North American stock markets will likely head lower this week. It is worthy to note that before markets began to correct in November because of news from the euro zone, markets were clearly in overbought territory. However, markets have not fallen much from their November highs, meaning that there is still room for markets to head lower.

Wednesday, November 24, 2010

More Reasons to Buy Gold

Yesterday, North Korea fired several hundred rounds of artillery onto a South Korean island.  As a result, gold rose over 1% for the day.  At 3:50pm EST, gold futures were up 1.3% to US$1,375.4/ounce.  Earlier in the day, it was as high as over $1,382.

Today, the situation is calming on the Korean Peninsula.  However, the euro zone crisis continues.  Investors are now looking beyond Ireland to the next shoe to drop.  Concerns about Portugal and Spain's sovereign debt situation are pushing the countries' government bond spreads to record highs.  For example, Spanish spreads over German debt are at a record high of 230 basis points.

If the situation in Greece in May was any indication, the situation in Ireland, Portugal and Spain are not going to be solved quickly.  Thus, investors can expect euro zone worries to drive equities lower and gold higher in the coming week.

Monday, November 22, 2010

Analysts Raising RIMM's EPS Estimates

Today, Oppenheimer & Co. analyst Ittai Kidron became the latest analyst to factor in sales of the PlayBook.  He expects RIMM to sell 100,000 PlayBooks in the fiscal 4th quarter (December to February) and 3.2 million tablets in fiscal 2012 (March to February 2011).  Thus, he raised his next year EPS estimate by $0.55, from $6.60 to $7.15. 

This follows TD Securities' Chris Umiastowski, who on Nov. 12 factored in RIMM selling 3.6 million PlayBooks in FY2012.  He raised his next year EPS estimate by $0.50, from $6.71 to $7.21.  As this blog mentioned on Nov. 14, most analysts had not modeled sales of the PlayBook into their estimates for RIMM.  Thus, I stated that investors can expect a wave of EPS estimate increases.

To date, about 3 analysts have incorporated the PlayBook into their estimates for RIMM.  Thus, more EPS estimate increases ahead are imminent, with most of the 30 plus analysts covering the company to yet model in the tablet. 

Shares of RIMM have been moving up in recent days due to analysts and investors beginning to realize the potential of its tablet.  An article in Reuters on Nov. 18 showed that companies such as Sun Life Financial and ING are planning to purchase the PlayBook

With RIMM still currently trading at a low valuation, and more news about the PlayBook to emerge in the weeks ahead, investors can expect the shares to continue to go up.  My 12-month target price for the shares is US$90.  To show how under-priced the shares currently are, applying a 14 times multiple to Oppenheimer's EPS of $7.15 gives a share price of US$100.1, while TD Securities' $7.21 EPS translates to a price of US$100.94 with a 14X multiple.  The shares closed today at $59.30.  

Sunday, November 21, 2010

North American markets flat on Ireland and China

North American markets ended the week flat. On Friday, the S&P 500 edged 3.04 points to at 1,199.73, while the Dow gained 22.32 points to end at 11,203.55. For the week, the S&P 500 was 0.04% higher, while the Dow was up 0.1%. 

The S&P 500 has been down 2.1% in the last two weeks on Irish sovereign debt concerns and tightening in China. On Sunday, it was announced that Ireland has accepted a rescue package from the EU and IMF, though the size of the package has not been determined.

Meanwhile, China's central bank raised banks' reserve requirement ratio (RRR) by 0.5% this week, the second rise in two weeks. It was due to China's strong economic growth and high inflation. With the increase, the RRR for state-owned banks now stands at 18.5%, a record high.

Gold and other commodities fall

With tightening occurring in China, commodities headed lower this week on demand concerns. In terms of soft commodities, the price of soy beans fell 5.3% this week, while the price of rice fell 2.4%. Cotton also dropped 8% after rising 60% this year. Meanwhile, NYMEX crude fell 4% this week, while copper fell 2%. 

Gold also fell, recording its second consecutive weekly decline. Its fall was due to the strengthening US dollar, as a result of debt troubles from Ireland. For the week, gold was down 1.2% to close at US$1,352.93/ounce.

The week ahead

Even though it was announced today that Ireland has accepted a rescue package from the EU and IMF, investors can expect some worries to remain, since the details of the package still need to be determined. In addition, it is believed that the EU will have to resolve the debt issues in Portugal and Spain next. Furthermore, with a red-hot economy and inflation pressures, further tightening measures can be expected in China. Thus, investors can expect markets to head lower this week. Investors will also be keeping an eye on retail sales, as we approach American Thanksgiving and Black Friday.

Sunday, November 14, 2010

Markets fall on Ireland and China

North American markets fell this week, ending a 5-week streak of gains.  For the week, the Dow and the S&P 500 were both down 2.2%.  This was mostly caused by Irish sovereign debt concerns, and tightening by the Chinese Central Bank.

Trouble in Ireland

Troubles from Ireland emerged early in the week, as the spread between Irish and German government bonds hit one record after another.  Markets also began to believe that the EU and IMF need to put together a rescue package for Ireland.  Troubles from Ireland began to surface in early September with the nationalization of Anglo Irish Bank.  This also reported on troubles from Ireland as soon as they surfaced.  However, expectations for QE2 overshadowed euro zone problems in September and October.

Tightening in China

The Shanghai Index fell 5% on Friday, after rumours spread that China will raise the interest rate in the coming months.  This followed the Central Bank's recent decision to raise banks' capital ratio by 0.5%.  This also caused the Dow and S&P 500 to fall on Friday. 

Gold falls

The price of gold fell this week along with other commodities.  For the week, gold futures were down 2.3% and closed at US$1365.5/ounce. 

Outlook for the week ahead

With sovereign debt troubles finally catching the market's attention, and tightening expected to continue in China due to strong GDP growth and inflation, this maybe the perfect storm that can send markets more than 10% lower.  The situation in Greece in May showed that sovereign debt crises take a long time to resolve, due to politics and social issues.  Thus, the debt trouble in Ireland is likely to also weight on markets for several weeks.  In addition, Portugal is expected to be the next country to face a similar situation as Ireland.    

5 Reasons to Buy RIMM Now

RIMM's shares have been having a rough year. The rapid growth of Android devices, and the popularity of the iPhone have caused the Blackberry-maker's shares to be down 13% this year. In addition, certain countries in Asia have threatened to ban Blackberries due to their strong encryption. These factors caused the shares to trade at less than 8 times next year's earnings, when they hit the 52-week low of US$42.53 in August. This is despite the company reporting earnings growth of 76%, revenue growth of 34% and record shipments of 12.1 million phones in the latest quarter.

Since its 52-week low in August, the shares have risen 38% as of Nov. 12. This rise has been caused by agreements with countries on encryption, and more details about the PlayBook tablet. In fact, on Nov. 11, RIMM shares rose 6%, its biggest gain in 4 months, after the Co-CEO said the PlayBook would sell for under US$500 in the first quarter. The following are 5 reasons why the shares can still move much higher.

1) The Playbook will add as much as $1.00/share to RIMM's earnings

On September 27, RIMM showcased its first-ever tablet, the PlayBook. It has a 7” screen, runs on a 1GHz dual-core processor, has front-facing 5MP and rear-facing 3MP cameras, 4 times as much RAM as the iPad and twice as much RAM as the GalaxyTab. It will also run Flash, which the iPad does not. The PlayBook will launch sometime in the first quarter, and I expect it to launch in January.

Most analysts covering the company have not factored in sales of the tablet into their models. On Friday, TD Securities' Chris Umiastowski became one of the first analysts to model the PlayBook into their estimates. He expects RIMM to sell 3.6 million PlayBooks next year, and for the PlayBook to grab 6.6% of the tablet market share. As a result, he increased RIMM's FY 2012 earnings forecast from $6.71/share to $7.21/share, an increase of $0.50/share.

However, with Apple selling 4 million iPads every quarter, I believe even Chris Umiastowski, who is relatively bullish on RIMM compared to other analysts, is being conservative. The PlayBook beats the iPad on every specification. In addition, Android tablets such as the GalaxyTab run on Android 2.2, which even Google said is “not optimized for tablets”. Pent-up demand from enterprise customers using Blackberries and current Blackberry users should provide very strong sales for the tablet. In addition, the lowest model of the PlayBook being priced under US$500 will also help sales.

Thus, it is reasonable to expect RIM to grab more than 6.6% of what Gartner now expects to be a 54.8 million unit tablet market in 2011. For example, the PlayBook grabbing twice as much of the 6.6% market share that TD expects would mean that the tablet would contribute $1.00/share to earnings. RIMM has said that subsequent versions of the PlayBook will run on 3G and/or 4G, making this estimate even more realistic. In addition, most analysts have not yet modelled the PlayBook into their estimates. Thus, investors will see a wave of EPS estimate increases for RIMM in the weeks ahead.

2) Rapid smartphone market growth and RIMM's dominance in emerging markets

Much of the analyst and media attention on RIM in recent months has been market share loss in North America, predominantly to Android phones. In fact, this is one of the main reasons why RIMM shares are down 13% year-to-date. RIMM has been losing market share in North America due to a lack of a high-end, pure touch-screen device. However, while RIMM is experiencing some market share loss in North America, the rapidly growing smartphone market, and international expansion by RIMM more than makes up for this loss.

First, the worldwide smartphone market is growing far faster than RIMM is losing market share in North America. For example, a report by Gartner on Nov. 10 showed that the smartphone market grew 96% in the 3rd quarter from a year earlier. Thus, despite all the concerns about competition, RIMM's share of the overall mobile phone market rose to 2.9% from 2.8% a year earlier.

In addition, RIMM's aggressive push into emerging markets has given it a large market share in these countries. An article on Nov. 11 in Bloomberg stated that IDC found RIM to be the number one smartphone brand in Latin America this year, beating Apple. In emerging countries such as Brazil, China, India and Mexico, most phone buyers choose the pre-paid option instead of going on a 2- or 3-year contract because of a lack of credit.

Thus, Blackberries have a significant advantage over the iPhone, since it costs about US$250 for a Blackberry Curve, versus US$700 for the iPhone. In addition, Blackberries also have the highly popular Blackberry Messenger (BBM) service, and use less data than iPhones or Androids. BBM allows users to save on their phone bill, by allowing them to instant message their friends for free instead of making a call.  RIMM's continued dominance in Latin America and Indonesia, and a push into China and India means that RIMM will gain far more market share than it loses in North America.

3) RIMM's future prospects are better than what most people think

The rapid growth rate of Android devices in North America, and the iPhone's popularity have many people seeing a grim future for RIM. However, the upcoming Storm 3 and the PlayBook (both discussed in other sections) plus the QNX OS (operating system) will provide RIMM with a very bright future.

RIM purchased QNX Software Systems in April. The QNX embedded OS is currently used in Caterpillar machines, cars (including Audi, BMW and Porsche), defense systems, medical devices and nuclear powerplants (Westinghouse and AECL). The Tablet OS that is on the PlayBook runs on the same microkernel technology, making it built for multi-tasking and extremely reliable. Thus, the reliability that is used in the OS of nuclear powerplants will also be in the PlayBook's OS.

In addition to tablets, RIMM has said that it intends to put the QNX OS onto Blackberry smartphones. Blackberries running QNX OS are expected to launch by May 2011. Thus, in a few months, RIMM smartphones will have the multi-tasking, performance and reliability that is unmatched by the iPhone or Android devices.

4) Storm 3 will be able to compete with iPhone 4 and Android devices

The biggest reason why RIM has been losing market share to Androids and iPhone in North America is because of a lack of a high-end, pure touch-screen device. Storm 1 was too buggy, while Storm 2 has been on the market since Nov. 2009. RIM has been working on the Storm 3 for a long time. Since RIM has taken a leaf out of Apple's book, and is keeping the device under heavy secrecy, only one picture of the device has been leaked. The Storm 3 is expected to have a 3.7” screen, 1GHz CPU, 1 GB RAM and 8GB of storage, making it on-par with the iPhone 4 and various Android phones.

Since the Storm 1 came out in Nov. 2008 and the Storm 2 in Nov. 2009, it is logical that the Storm 3 will be launched around Nov. 2010. Apple has the same policy with the iPhone, with the iPhone, iPhone 3G, 3GS and 4 each being released 1 year apart. Thus, I expect the Storm 3 to be announced at CES 2011, which is taking place January 6-9. In fact, it has been shown in Verizon's leaked roadmap that there will be a 4G RIMM device on the network in early 2011. The announcement and launch of a Blackberry that can fully compete with the iPhone and Android devices should be a big boost to RIMM's shares.

5) Valuation

As mentioned previously, RIMM was trading at less time 8 times next year's earnings when it hit its 52-week low in August. The company is reporting significant earnings and revenue growth (76% and 34% growth respectively in the latest quarter). It has also been shipping record numbers of smartphones in recent quarters.

Consensus on the Street is for earnings of $6.28/share next year. That is for forecasts in which analysts have not yet modelled in the PlayBook. Even excluding the PlayBook, RIMM is trading at 9.36 times next year's earnings, far cheaper than Apple, Motorola and even Nokia. With a 14 times P/E ratio applied to EPS of $6.28, RIMM would be at US$87.92, which is 49.52% above the closing price on Nov. 12. Pricing in $1.00/share for the PlayBook gives EPS of $7.28, which gives the shares a price of $101.92 with a 14 times multiple. That is 73.33% above the closing price, making the shares very attractive at current levels.

A bargain with continued growth ahead

RIMM is a clear bargain at current prices.  Pricing in $1.00/share in EPS for FY 2012 for the PlayBook means that the stock is trading at 8.08 times future earnings.  This is significantly cheaper than peers such as Apple, Motorola and even the struggling Nokia.  Despite all the media concerns about Android and Apple, RIMM's earnings and revenue are still growing at over 20%. 

Takeover rumours are another catalyst for the stock.  In August, takeover speculation once again circulated, as RIMM's price tag fell to $23 billion.  The company remains affordable for Microsoft, Cisco and Oracle.  For example, if Microsoft's Windows Phone 7 (WP 7) disappoints, Microsoft would have to acquire a smartphone company, and RIMM would be the best option.  After the spectacular flop of Microsoft's Kin One and Kin Two in July, WP 7 is Microsoft's final chance in the smartphone market. 

It is common knowledge that Microsoft prefers to succeed in the market with its own smartphones.  However, if that does not work, it would have to acquire someone else.  The fact that WP 7 lacks multi-tasking and copy-and-paste functions makes this possibility all the more likely. 

Tuesday, November 9, 2010

All in on natural gas

Natural gas has been rising in the past week.  Today, it broke above US$4, trading at US$4.14 after rising 1.27% at 9:30am.  There are many reasons to go long on natural gas right now.

First, the price of natural gas has been tumbling in the past 12 months.  With brent crude currently trading at US88.79/barrel, the ratio between oil and natural gas prices is as high as 21.45 to 1. 

Second, seasonality will likely see natural gas trading much higher in the coming months.  Consumption of the commodity rises every winter, as consumers in North America use natural gas to heat their homes.  This always results in a spike in prices.

Finally, this is expected to be a colder winter then usual worldwide.  A few weeks ago, European scientists predicted that this will be the coldest winter in Europe in 1000 years.  La Nina is also expected to provide North America with a colder winter than normal.  Signs of this colder-than-usual weather have already emerged.  For example, the Toronto area recorded the coldest Halloween in 10 years.

I expect natural gas to hit US$6 before April 2011, and I have positioned myself and clients into the ETF HNU listed on the TSX.

Sunday, November 7, 2010

North American markets rally on QE2

North American stock markets surged following US Federal Reserve Chairman Ben Bernanke's US$600 billion QE2 announcement on Wednesday. For the week, the Dow was up 2.93%, while the S&P 500 rose 3.99%. In fact, North American indices rose to their highest level since September 2008, when Lehman Brothers collapsed. In addition, the S&P 500 has gained about 16% since the beginning of September. 

Apart from QE2, markets also got a boost from Friday's October non-farm payroll, in which 151,000 jobs were gained. It was better than the 60,000 job gains expected. In addition, September private sector job additions were increased from the original 64,000 jobs to 107,000. September job gains were also revised from a previous loss of 95,000 jobs to a loss of 41,000.

Gold hits another record high

Following QE2, the price of gold hit another record high on Friday, reaching US$1,397.7/ounce. It had pulled back 5% from mid-October to November 2nd, after its previous record high of US$1,387. However, QE2 is pushing the US dollar lower, which increases the prices of all commodities, including gold. Oil was also strong, as Brent Crude rose to $88.11/barrel on Friday, its highest level since September 2008.

The week ahead

QE2 is having the effect on stock markets that Ben Bernanke intended, which is to lift stocks higher so that Americans are wealthier, and can spend more. The depreciating US dollar and continued access to cheap money should continue to lift markets, especially as we head into the traditionally strong holiday season of November and December.

However, it is important to note that North American markets are in overbought territory, making it susceptible to short-term pullbacks. The S&P 500, for example, is more than 2 standard deviations above its 50-day moving average. Nevertheless, I expect North American equities to be 10% higher than Friday's close sometime before the end of December. I am also raising my forecast on gold by $20/ounce, as I am now expecting gold to be US$1,450/ounce before 2011 begins.

Thursday, November 4, 2010

Gold and stock markets soar on QE2

After US Federal Reserve Chairman Ben Bernanke announced a US$600 billion QE2 yesterday, North American markets are significantly higher today.  The S&P 500 rose 1.93% to 1,221.06, while the Dow jumped 1.96% to 11,434.84.

Gold surged 3% and broke through its October all-time high of US$1,387 today, going as high as US$1,393.  In a post I wrote on Tuesday before the QE2 announcement, I stated "...due to QE2, I expect US equities to rally 10% sometime within the next 3 months.  In addition, I expect gold to continue to rally, surpassing its October record high of US$1,387/ounce...My estimate is for gold to hit US$1,430/ounce by the end of 2010."  It appears that those estimates are looking very good right now.       

Tuesday, November 2, 2010

My QE2 expectation

US Federal Reserve Chairman Ben Bernanke is expected to announce QE2 tomorrow (November 3rd).  My expectation for QE2 is an announcement of US$80 billion to US$100 billion per month, totaling no more than US$900 billion.  More importantly, I expect Ben Bernanke to promise further action if needed when QE2 expires.  He may even state an estimate for the total amount for QE2 and QE2+/QE3, though that is less likely.

While QE2 will be much smaller than the US$1.75 trillion QE1, investors should not underestimate the willingness of "Helicopter Ben" (Ben Bernanke's nickname) to conduct quantitative easing.

As a result of cheap money due to QE2, I expect US equities to rally 10% sometime within the next 3 months.  In addition, I expect gold to continue to rally, surpassing its October record high of US$1,387/ounce.  In fact, US$1,400/ounce is an easily achievable level for gold before the end of 2010.  My estimate is for gold to hit US$1,430/ounce by the end of 2010.