Prem Watsa Doubles Down On Research In Motion

A 13F filed with the SEC today reported that Prem Watsa’s Fairfax Financial Holdings– which has roughly doubled its value since 2007 on a series of good investments- owns just under 52 million shares of Research In Motion (NASDAQ:RIMM), the beleaguered manufacturer and seller of BlackBerry brand smartphones. Earlier this year Watsa had joined RIMM’s board and increased his holdings to the point that Fairfax owned a little over 5% of the company (read earlier coverage on Watsa’s investment in RIMM). As a number of other smartphone makers- namely Apple (NASDAQ:AAPL) and the various phone companies linking their products to Google (NASDAQ:GOOG)’s Android system- have moved into the market, Research in Motion has struggled. Its share price, currently at about $6.60, is down nearly 90% from 2 years ago and down over 50% so far this year as an increasing number of business users, which had long been the stronghold of the BlackBerry brand, have abandoned it for iPhones or Android-enabled smartphones. For Watsa, a successful value investor, to effectively double his stake in the company to nearly 10% he must see some path back to profitability, even as Wall Street analysts expect losses of $1.50 per share in the company’s fiscal year ending February 2013. These losses are nearly 25% of the current share price.

Prem Watsa

Research in Motion reported its Q1 2013 results last month, and the news was broadly bad. Revenue was $2.8 billion compared to estimates of $3.1 billion, as the quantity of phones sold fell 41% from the same quarter the previous year, and the company lost 37 cents per share. The new BlackBerry 10 line of phones will be delayed, and with it any immediate improvement in RIMM’s business prospects. Worse, smartphones are likely to be bought as a durable good designed to last years; by early next year, will RIMM’s business-savvy consumer base have decided to avoid a company it believes is having financial difficulties, thus creating a self-fulfilling prophecy?

The investment case for RIMM rests on Watsa and other hedge fund buyers. Jim Simons’s Renaissance Technologies and Rob Citrone’s Discovery Capital Management both took fresh stakes in the stock in the first quarter of 2012. Renaissance owned 7.3 million shares (see what else Renaissance has in its portfolio) and Citrone, a former employee of Julian Robertson at Tiger Management, had 4.6 million shares in Discovery (research Rob Citrone’s other stock picks). As mentioned, the stock is well down this year and investors have an opportunity to buy into the stock at lower prices than these top investors did.

We are skeptical of these moves by Watsa and others. While we understand that value investors should generally pursue stocks in industries that are out of favor with the market (and, similarly, avoid overhyped industries), RIMM’s problems are not due to broad investor sentiment concerning its industry. Apple and Google are fearsome competitors in the smartphone market, and a number of consumers who would prefer a more keyboard- or productivity-oriented mobile device now have the option of an increasing number of tablet devices from Apple, Amazon (NASDAQ:AMZN), and possibly Microsoft (NASDAQ:MSFT). BlackBerry’s brand is currently hemorrhaging business users; any company turnaround depends on a “Come home to BlackBerry” strategy in the face of a stunning number of competitive options which are better positioned for music, web browsing, and online shopping purposes, which looks dicey from our point of view. We plan to watch Fairfax’s strategy unfold from the sidelines.