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What the investor shorting strategy could mean for BlackBerry

Tamsin McMahon on speculation about BlackBerry stock


 

Leon Neal/AFP/Getty Images

In what has been a volatile and largely irrational stock market, one investment strategy has been almost guaranteed to be a sure thing: shorting BlackBerry.

The Canadian tech company’s stock has been on a wild ride during the past few years. Its share price has plunged to just over $6 in September from $70 in 2011 with much speculation it may not survive into 2013.

Shaking up its leadership and trying out a new name hardly seemed to inspire renewed confidence. Nor did releasing a completely redesigned smartphone, the BlackBerry Z10, at the start of the year.

A whopping 35 per cent of BlackBerry’s 485 million outstanding shares are currently shorted. That compares to less than three per cent of shares in Microsoft, Apple and Google.

Shorting is a risky strategy. Investors essentially borrow stocks from their brokers to sell on the open market. Then they wait to see if the price goes down so they can buy them back for less than they paid and return the stock to their broker. If all goes well, the stock price drops and the investor pockets the difference.

The risk comes from the fact that a company’s stock price can go up indefinitely, meaning investors could suffer virtually unlimited losses. If a stock price rises too much, brokers might start demanding their money back, which forces investors to buy the stock at a loss. The risks are even greater if lots of investors are shorting the stock since that makes them all the more sensitive to the company’s share price.

With more than a third of Blackberry’s stock now shorted, it won’t take much of a price increase to set off a panic among the shorts. That has led to much speculation that BlackBerry stock is ripe for what the investment industry calls a “short squeeze.”

Under a short squeeze scenario, if a company’s stock price starts to rise, investors who are shorting that stock start to buy it in order to limit their losses. If enough start to do this, that can send a stock price rising even faster, causing even more investors to start covering their losses, until a company’s stock price basically starts charting the route Chris Hadfield took to get to the International Space Station.

That’s what happened to Netflix earlier this year after the online streaming company announced it had signed up 2.1 million new subscribers in the last quarter of 2012. The news wasn’t that great — the company announced its income had actually fallen 78 per cent compared to the year before. But with nearly 25 per cent of its stock shorted at the time, it was enough to send the stock shooting up 42 per cent in four days.

Nearly half of Tesla Motors shares were shorted when the company announced the surprising news in May that it had turned a $15 million profit and outsold General Motors’ Volt and Nissan’s Leaf to become the best-selling electric car in America. Granted, they still sold fewer than 5,000 cars.  But the news sent Tesla’s share price skyrocketing to $106 from $35. The Wall Street Journal dubbed it “The Mother of All Short Squeezes.”

A short squeeze is far from inevitable, particularly since many of the shorts are believed to be large hedge funds that are keen to see BlackBerry’s stock price keep falling. Analysts have been pretty divided over how well the company’s first touchscreen-only phone has been selling in the U.S., or how well the QWERTY keyboard version of the phone will do when it’s released south of the border this month.

But BlackBerry may need only modest good news when it releases its first-quarter results June 28 in order to boost its stock price and “shake out the shorts,” as investors like to say.

Whether that translates into a sustained rally is another matter. The company’s long-term future is far from certain, but at least BlackBerry will have succeeded in proving the naysayers wrong. If perhaps only for a little while.


 

What the investor shorting strategy could mean for BlackBerry

  1. The shorts have been killing my investments the past few months. It’s very disheartening to spends countless months building up value only to have all that value destroyed in a day or two by shorts that are “validated” by completely subjective and/or false so-called “analyst reports” (re: Pacific Crest et al… More returns than sales? How does that work?).

    I’m still long BB and am “keeping up the faith”, but wow has this stock ever shown me the man behind the curtain pulling the strings – something I wasn’t even aware of until following this stock closely.

    • Don’t forget Deutsche Bank’s Brian Modoff recent report in which his analysis of Q10 sales in UK concluded they were poor……which is not surprising seeing as his analysis included stores that did not have the phone for sale !
      seekingalpha.com Micheal Collins has been great at exposing these frauds, unfortunately the mainstream media are all to willing to copy and paste ‘reports’ from corrupt analysts.

    • I completely agree. I’ve never seen anything like the blatant manipulation that’s being done with Blackberry. If any example should bring about a re-assessment of the rules of shorting (and using reports and media to steer things), this should be it.

      There is nothing stopping analysts and media outlets from publishing bogus reports and completely manipulating the value of a company. How can that not be illegal?

      • The US has to ensure there is an uneven playing field to survive, so shorting, aftermarkets, premarkets, etc. will all live on.

  2. So this is the great arbiter of value and efficiency? The rational way to set the true value of a given stock and properly account for risk capital?

    This kind of manipulation would be illegal at a casino, but it’s apparently just fine when you’re playing with other people’s pensions.

    • The economists argue that people who place money in the stock market unwisely don’t tend to last long.. as they run out of money, so sooner or later the true valuation of a company is reached. Of course, “sooner or later” is a hole big enough to drive a death-star through. Sooner or later I’ll have another coffee, and sooner or later our sun will go out.

      Anybody who invests in the stock market, at all, needs to watch this video: http://www.wimp.com/manipulatingmarket/

      Part of the problem is that most of what goes on on the stock market these days isn’t investing, it’s trading. We need to get rid of the trading and get back to investing, and to do that we need to extend the length of time people stay invested for. Personally, I suggest doing that by setting captial gains rates to 100% minus the number of weeks the security has been held for, to some minimum value.

      • you … you …regulator!

      • All me extremely naive but that is shocking stuff from Jim Cromer. How does he still have a job? I thought he was loud and obnoxious but not this.

        • Cramer that is

  3. Seems to me that maybe banning the lending of shares would be the best way to prevent this type of fraud from occurring.

    • Wouldn’t help.

      You don’t actually need to lend any shares, because another way to look at shorting is someone sells the shares they have and gives you the money, with the agreement that later on you will give them the money they need to buy the shares back. Shorting a stock simply uses the “short” in place of that lending agreement and the brokers serve as the enforcement agents for it.

      Besides that, it’s not fraud. It’s folks who think that the stock will go down, and are placing money on that bet. The problem with it, the same as with the rest of the secondary stock-market (ie, anything that’s not a public offering or company buy-back), is that the bets can influence the price of a stock far more than most of the company’s actual activities.

      • It’s bogus, when I buy a stock, why should another party be allowed to borrow it. Almost wants me to ask that the physical share be delivered instead of holding street.

        • I’ve been told that if you put your shares up for sale they can’t be touched. So I have a good till cancelled sell order for all my shares @ $50 right now. Some brokerages won’t allow you to go that high so trial and error… or call them and demand it. Questrade allows any price it seems. This is assuming you’re not trading on margin. If it’s borrowed money they can lend your shares to short and you can do nothing about it.

  4. Yes, shorts bad, vast conspiracy, poor little innocent Canadian company.
    Can we all remember that BlackBerry’s woes overwhelmingly stem from a single decision by its most senior management to dismiss the iPhone in 2007. Shorts smell blood precisely because BlackBerry has been gushing so much of the stuff for years. If, as my colleague Tamsin writes, there’s a positive surprise, the shorts are going to get demolished. That risk comes with the trade. But short sellers are certainly not the reason BlackBerry has gone from a $150 stock to one barely treading water around $15.

    • Thanks for the history lesson, its essentially a totally new company so there is no need to continuously rehash this.

  5. If TSLA is mother of all short squeezes which I agreed it was, than Blackberry will be father of all short squeezes or even the grandfather of all short squeezes in June or at best in September.

    I am keeping adding my long position, and I count if it goes to just $20, I will be happily retire to dedicate myself to fight another battle with shorts.

    The shorts in the case of bbry are bolder, stubborn, and greedier than those in tsla and ntlx. They deserve a historical stampede in way to their graveyards.

  6. If your a shareholder in any company you should know how the company is doing
    You should not have to wait for a quarterly report. Monthly reports would make the company more transparent. They do not have to be detailed. Right now it’s: “Here’s my money now run off with it do what you please. In 3 months I’ll find out if you are any good at your job”.

    • Anyone who has been following BB since the QNX acquisition is well aware that they recognized and began the recovery from their big mistake many years ago. Shorts began bashing the company way back when. I think the best thing for the company is to go private.

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