My Pair Trade, Long Apple/Short BlackBerry, Is Up 100%, Has The …
Summary
In January of 2013 I saw similarities between the stock of Apple and BlackBerry even though they were at opposite ends of the spectrum.
At that time, I suggested a pair trade was in order. I stated to go long Apple and short BlackBerry.
The trade has returned nearly 100% with both stocks performing exactly as I presumed.
My contrarian instincts tell me the worm may have turned once again. In this article, I will lay out my thoughts on the trade and names going forward.
Overview
“Whenever you find yourself on the side of the majority, it’s time to pause and reflect.” – Mark Twain
What a great quote from Twain. Let’s reflect. A contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive cynicism about a stock can drive the price so low that it exaggerates the investment’s perils and belittles its future prospects. Conversely, pervasive optimism about a stock can drive the price so high that it exaggerates the investment’s well-being and overstates its future prospects. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts. One of Warren Buffett’s most famous quotes is:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”
This contrarian mindset was the genesis of a piece I wrote regarding going long Apple (AAPL) and short BlackBerry (BBRY) in January of 2013. In the following sections, I will explain the reasoning behind the trade at the time, review the performance of the trade to date, and make a call regarding the current state of affairs for each stock.
Flashback to January 2013
Apple Inc. and BlackBerry both presented contrarian investing opportunities and made for an epic pair trade in my mind at the time. I wrote a piece titled, “Epic Pair Trade: Go Long Apple And Short RIM“. In retrospect, it was an ingenious call as the pair trade has returned nearly 100% to date. The following section is a short synopsis of my thoughts at the time.
Apple 2013 Redux
Apple was completely out of favor. No one was saying it’s time to step up and buy stock. Even so, the stock appeared to be consolidating to me at the $450 mark.
(Source: Finviz.com)
Apple had lost 30% of its market value in just the last quarter, falling from a high of over $700. Even so, the stock had just bounced off long-term support and was still in a long-term uptrend, yet no one cared or spoke about this fact at that point.
(Source: Finviz.com)
Apple had just announced financial results for its fiscal 2013 first quarter. The company posted record quarterly revenue and net profit. The results compared favorably on a year-over-year basis. Apple’s CEO Tim Cook said at the time:
“We’re thrilled with record revenue of over $54 billion and sales of over 75 million iOS devices in a single quarter. We’re very confident in our product pipeline as we continue to focus on innovation and making the best products in the world.”
Tim Cook may have been thrilled, but the investing world was not. The negative rhetoric had grown so loud no one could see the forest through the trees at the time. Apple was fundamentally sound and looked oversold and undervalued to me, and I was right.
BlackBerry 2013 Redux
Speculation regarding the launch of the BlackBerry 10 had driven the stock to nosebleed heights. The stock had gapped up several times and gone parabolic.
(Source: Finviz.com)
I suggested investors should fade the rally and short the stock. The stock was down 7% on the previous day after failing to break through long-term resistance at the $17 mark.
(Source: Finviz.com)
BBRY had ascended 90% in three months. The price action over the last three months was parabolic in nature. This often marks the end of a stock’s upward momentum. All parabolic moves are inevitably proven unsustainable and break down at some point.
I speculated that the BlackBerry 10 launch was too little too late, the competition was fiercer than ever, and the stock failed to break through major long-term resistance level. Further, BBRY had lost one million subscribers in the previous quarter alone.
Pair Trade Performance To Date
Since that time the pair trade has garnered a total return of 96%. Both my intuitions were proven correct. Apple has gone from $452 to $655.47. This has produced a return of 43%.
(Source: Yahoo.com)
BlackBerry on the other hand has gone from $16.62 to $7.79. This has produced a return of 53%.
(Source: Yahoo.com)
Has the Worm Now Turned?
It appears to me as if a reversal of fortune has occurred for both the stocks. Moreover, each of these stocks now resembles the other in my previous article. This has created another potentially profitable contrarian investing opportunity.
Apple’s Current Status
Currently, Apple is a market darling. Innumerable pundits and bloggers are swooning over the prescient financial engineering implemented by the company. An incomparable number of articles have been written about the stock split, cash hoard, capital return plan, and the unprecedented product launch that lies ahead. I must admit, I was caught up in the euphoria with everyone else until recently. The throng of positive comments is now disconcerting. Moreover, numerous long time bears have just recently changed their stance and gone long the name. I see this as a telltale sign we have reached an inflection point. The recent stock action supports my position. Over the last few months Apple’s stock has gone parabolic.
(Source: Finviz.com)
Apple’s stock is now firmly in oversold territory with a RSI of 79.44. The stock is up 21% for the quarter, trading at the 52 week high, has surpassed most analysts’ price estimates, and trading 21% above the 200 day SMA. Furthermore, the stock just failed its first attempt to break through long-term resistance.
(Source: Finviz.com)
I suggest most of the good news has already been priced in at this point. The new product launches may be a sell the news event. Moreover, the stock split is a non-event in reality, yet has caused a major fervor in the name. What’s more, the stories of the unprecedented product launch have vision of sugar plums dancing in market participants heads.
This is no time to be jumping into the stock. I submit you have missed the boat my friends. Now, let me be clear. I am not saying to short the stock. I am saying I would take a wait and see approach for the remainder of 2014. If you can’t wait, at least look for a decent pullback to start a position. Nothing goes up in a straight line. If you’re long now it may be a good time to manage your position a bit and take some profits. I’ll leave it at that.
BlackBerry’s Current Status
Currently, BlackBerry’s stock is extremely out of favor. Innumerable pundits and bloggers are lampooning the company over the failure of its smartphone products. An incomparable number of articles have been written about the failure of BlackBerry’s smartphones, the drop in subscribers, the potential for dilution, and the possibility BlackBerry may actually cease to be a going concern.
I must admit, I was caught up in the wretched outlook for the company with everyone else until recently. The throng of negative comments recently seems repetitive. Moreover, the new CEO seems to have a handle on the cash burn situation. Furthermore, many recent developments regarding security breaches at major companies have highlighted BlackBerry’s enterprise service business, well known to be highly secure. Furthermore, the stock is in an uptrend currently and has been consolidating at the bottom of the uptrend channel for several months.
(Source: Finviz.com)
Moreover, BlackBerry’s stock has just bounced off the long-term support line.
(Source: Finviz.com)
I suggest most of the bad news has already been priced in at this point. Even more, there appears to be several positive catalysts for the stock in the near term. For a more in-depth review of the current positives regarding BlackBerry’s future, I suggest you read this recent article on BlackBerry’s prospects. The following is a short snippet of the author’s thesis:
“BlackBerry has successfully transitioned from primarily being a consumer handset provider to an enterprise service provider that complements its other business units. Each of the four business units can independently earn revenue and are continually extending into new markets. Continued innovation, investment, and strategic partnerships will lead the stock to new year highs.”
My instincts tell me the upcoming earnings announcement on June 19th will be a positive one. If I was considering starting a position in BlackBerry, I would buy a portion of the position prior to earnings. I would layer in to the position in thirds. I would purchase one third prior to earnings, one third after, and the final third when things settle down a bit. The risk reward equation regarding BlackBerry’s stock is now favorable for longs in my eyes.
The Bottom Line
I believe both these stocks are at inflection points. Most likely, both stocks are about to perform a trend reversal presently. The following is a famous quote from Benjamin Graham, a famous value investor who has made millions in the market:
“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.”
I believe this quote is quite apropos regarding Apple’s recent ascension and BlackBerry’s collapse. The majority of investors seem to be selling out of BlackBerry and piling in to Apple at exactly the wrong time. I say go against the grain – buy BlackBerry and sell Apple now.
Source:
My Pair Trade, Long Apple/Short BlackBerry, Is Up 100%, Has The Worm Turned?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)
Source:
My Pair Trade, Long Apple/Short BlackBerry, Is Up 100%, Has The …
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