What’s on the docket today? An ad for Jim Woods’ Successful Investing, which seems to be a newly revamped version of that longtime “entry level” investment newsletter (founded by Dick Fabian — Jim took over the Successful line of letters when Dick’s son, Doug Fabian, left the newsletter business in 2017). The letter is being pitched at $49/year, and this is the intro that caught the attention of our eagle-eyed Gumshoe readers:
“Why Would One of the World’s Smartest Investors Sink $522 Million Dollars Into a “Busted” Tech Stock?
“Because even if it only makes it back to half its former share price, he’ll pocket 650% gains.”
I’d challenge you to find a serious institutional investor who puts millions on the line because “it might get back to half of its former price” — that’s just inane.
But still, we want to ID the “secret” stock for you, so we’ll take that silliness in stride. What else are we told here?
“One of the smartest and most successful investors in the world has been secretly buying shares in a tech stock that most investors have turned their backs on.
“His goal? To make a killing.”
So what’s the stock?
“This company was once a market leader, with a 40% market share of one of the most indispensable pieces of personal technology anywhere on the planet.
“Its name was synonymous with its signature product, like ‘Kleenex’ for tissue or ‘Xerox’ for copiers.”
Curiouser and curiouser… what could it be? More clues…
“Today, you can get shares of a former tech titan at a 95% discount to its historical high.
“They’re going for about $10 each, which is $220 less than their all-time-high share price.
“Usually, a price plunge like that indicates a company’s on its last legs. But not here…
“That’s because one well-known investor has been betting big – HUGE really – on this left-for-dead tech play.”
How big is this mysterious investor “betting?”
“At today’s share price, he’s in for a staggering $522,000,000 – that’s $522 million or about 1/3 of his entire portfolio.”
Wow… OK, even to those of us who shampoo with Dom Perignon, that’s a lotta dough. Who is this guy? Why does he love this beaten-down stock? And, well, what is the stock?
Woods says that “even if shares only return to half their former $230 glory, that’ll still be a 650% gain for the renegade trader I just told you about.”
Ready for your answers? As luck would have it, this one is related to my portfolio… so we don’t even have to fire up the Thinkolator today.
Prem Watsa is probably not the person you picture when someone says, “renegade trader” … but yes, he does make some big bets with the equity portfolio of Fairfax Financial (FF.TO, FRFHF), the growing Canada-based insurance conglomerate that he runs and which is often compared to Berkshire Hathaway (BRK-A, BRK-B)… and one of those bets is this “secret” stock, the Canadian tech pioneer Blackberry (BB).
Remember carrying a Blackberry around, filing your thumbnails to a point so you could press those tiny little buttons on the keyboard? Yes, you can still get them… but Blackberry isn’t focused on developing or selling new phones anymore, not after playing “hare” in the tortoise and hare smartphone race and forgetting to watch out for both Google’s Android and Apple’s iPhone coming up behind them. They even have a new phone out this month, the Key2, with a redesigned keyboard for the diehards who still insist on a physical QWERTY keyboard.
But those new Blackberry Mobile phones are only tangentially related to the fate of Blackberry the company, which licensed its almost-dead mobile phone brand to a Chinese company, TCL, a couple years ago (the Key1 and Key2 are from that new company, they both run Blackberry’s secure systems but are also based on Android). The surviving Blackberry company that Fairfax owns shares of, and that’s being teased here, is really now a software company, not a hardware company, and they are focused on security — their big spiel these days is all about “EoT”, the “Enterprise of Things” which they say “enables digital transformation using hyper-connected ‘things’ that are highly secure.”
They report at the end of next week, so we may learn something new by then, but the basic idea is that wearables and other devices, including cars and phones and robots and whatever else, need connectivity to be useful, and connectivity increases security risks, so therefore the “enterprise” needs something more secure than regular consumers might demand. They’re expecting that a holistic approach to security using Blackberry Secure will make companies feel much more comfortable with their private data.
The transformation of the company, from a failed handset maker to a software and services company that leverages their expertise in security, has taken a few years but is almost complete now. Software and services last year were more than 80% of revenue, and, not surprisingly, that has improved margins (software is typically higher-margin than hardware, since it’s more instantly and inexpensively scalable). Their annual analyst meeting presentation ended with their objectives, which are built around accelerating the “EoT” business to increase recurring software and services to 90% or more of their revenue, and to boost their operating income to 20-25% of sales (from 8% this past year).
So that’s an appealing goal to get those margins back up, of course, particularly because the top line looks so jarringly small and is not yet growing (Blackberry had almost $20 billion in revenue in its best year, 2011, and revenue has declined ever since to fall below $1 billion last year, with expectations that it will fall again this year to about $885 million).
They are just hitting profitability now, so that’s probably catching the eyes of some of you because the reported PE is actually quite low at about 19… but that’s unfortunately not a real number, most of those earnings over the trailing year come from a one-time adjustment, not from the actual operating business. On an adjusted operating basis, they’re still in transition and are expected to earn about six cents this year, doubling each of the next two years to hit 25 cents in 2021, so that’s a forward PE of about 50 on 2021 estimated earnings.
And yes, Fairfax Financial has about 33% of its disclosed 13F public equity portfolio in Blackberry shares, but it’s not actually that overwhelming a position for them in the bigger picture — it is a very, very large position, Fairfax owns about $530 million worth of Blackberry shares (a little under 9% of the company), and that accounts for almost 10% of Fairfax Financial’s $6.3 billion equity portfolio (more than 2/3 of Fairfax’s portfolio is not reported in the 13F filings, which are required only for institutional or major investor ownership of US-listed stocks).
That’s not new, and in fact the Blackberry position for Fairfax is smaller than it was a few years back — Fairfax used to be Blackberry’s largest shareholder, and offered to take the company over back in 2013 (they bid about $5 billion, but most people didn’t take the bid very seriously). They also hold a position in Blackberry’s convertible debt that could increase their equity holding considerably if converted (that converts at $10 a share, maturing in November of 2020). Fairfax’s Blackberry position is in the green, but I don’t know that it has been a particular profit driver over the past five years… even if Fairfax’s full position was put on at the all-time lows in 2012, which was almost certainly not the case, the stock has only risen about 90% from those lows (about the same performance you would have gotten from the S&P 500 over the past 5-6 years).
Prem Watsa appears to still be a strong believer in Blackberry CE John Chen, and my impression is that he has a fondness for Canadian companies in general (often noting, for example, that some business models that have failed or become overlevered in the US, like a few retail names he has invested in, are still quietly thriving in Canada — like Toys-R-Us)… here’s what Watsa said about Blackberry in his latest annual letter:
“John Chen has completed the transition of BlackBerry from a smartphone company to a software company with about $1 billion in revenue and growing. BlackBerry’s reputation for security for mobile devices, its focus on an integrated internet of things system and its very large patent portfolio stand it in good stead for the future. Its QNX platform has had much success with building autonomous car systems for the major automobile companies, and its Radar for the trucking industry continues to excel. In 2017, BlackBerry also benefitted from a $1 billion (about $2 per share) arbitration award from Qualcomm. We continue to bet on John!”
Interestingly, the only larger holder of Blackberry, at least according to the 13F filings (Blackberry is also listed in Canada, so those filings are not complete), is PRIMECAP — which is another pretty solid endorsement, since PRIMECAP has run some of the best growth-focused mutual funds for a very long time… the four largest mutual fund positions in Blackberry are all Primecap-managed funds (including PRIMECAP Odyssey Growth, where I have some money invested). So I apparently already have a substantial secondary exposure to Blackberry through Fairfax and PRIMECAP, which is fine, but it takes away any real temptation to buy the stock directly even if I were wholly confident (which I’m not, having just started researching the stock).
For another perspective, the Morningstar analyst is more circumspect on this one — largely because of the competition in their enterprise space. Here’s how their most recent analyst report starts:
“We remain confident in BlackBerry’s ability to increase the top line and expand margins after the firm presented its overall strategy at the BlackBerry Analyst Summit. As BlackBerry now focuses on providing a one-stop shop for secure enterprise mobility management software solutions, the firm is likely to benefit further from the growing EMM market. Management expects continuing software revenue growth and margin expansion, similar to our projections. While BlackBerry’s transformation into a software company is complete, we still consider the firm to have no moat, given the growing but yet crowded EMM space, which accounts for more than half of the firm’s software revenue. Our $10 per share fair value estimate is intact.”
So there you have it — yes, Prem Watsa is betting pretty big on John Chen and Blackberry, putting close to 10% of Fairfax’s listed equity portfolio into the shares of that Canadian software company. And yes, this was an $80 billion world leader in 2008, before the iPhone came out, and has fallen to a fraction of that with a market cap of under $7 billion. But no, it’s not going to go back to $230 a share anytime soon.
The business is improving, they seem to me to be on the right path with some really solid goals, and the new business model and focus on enterprise software and security provide some real potential for earnings to grow more quickly than expected if they are able to win more business, particularly in their mobile operating systems for cars but also in the “EoT” space more broadly… but it’s not necessarily dirt cheap or ignored, the mobile security and connectivity space is contested and competitive, and it’s not ever going to be the company it was when they effectively owned the smartphone space from 2006-2008.
Sound like your kind of investment? Does memory of the ubiquitous keyboard phone make you more or less likely to see value in the secure software business? Think their software transformation will lead to accelerating earnings growth, or that the competition will eat their lunch? Let us know with a comment below.
Disclosure: I own shares of Apple, Alphabet, Fairfax Financial and Berkshire Hathaway, mentioned above, and have money invested with PRIMECAP. I do not own Blackberry directly, or any of the other companies mentioned, and will not trade in any stock covered for at least three days, per Stock Gumshoe’s trading rules.
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