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.

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.

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.

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.  

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.