Should Value Investors Follow Prem Watsa into Research-In-Motion?
Facing fierce competition from iPhone and Android phones , Research-In-Motion’s Blackberry is so last decade and user-unfriendly. Consumers quickly abandoned their Blackberry phones and switched to the new generations of smart phones. Now Research-In-Motion is facing similar problems that some of its earlier competitors have, like Nokia (NOK) and Motorola. An interesting question here is, will Research-In-Motion face the same fate as Nokia or Motorola?
Research-In-Motion is certainly cheap. The company has no debt and has more than $1.3 billion in cash. It is now traded at a P/E ratio of around 3. This is the historical valuation of Research-In-Motion. It is traded at the lowest valuation from the perspective of all matrices such as P/E, P/S and P/B:
So should value investors buy RIMM, considering it is so cheap? Especially now, renowned value investor Prem Watsa has joined the board of the company and may buy more shares.
Being the founder of Fairfax who built his empire from almost nothing to a multi-billion dollar business, Prem Watsa knows how hard the process is and he holds tremendous respect to the people who have had a similar experience. During GuruFocus’ interview with him last year, he said this about RIMM: “… Research-In-Motion (RIMM), you'll find out we own some shares. Research-In-Motion is run by two guys, Mike Lazaridis, who's really the founder, and co-CEO Jim Balsillie. These guys have taken the company from 0 to $20 billion, and in our experience, that's not easy to do. It's very competitive, and yes they have some challenges ahead of them, but the guys who have taken it from 0 to $20 billion will be able to figure their way through this… For a similar reason, we bought Dell (DELL) when Michael Dell came back. Here's a company that went from 0 to $60 billion in revenue, and tons of hurdles he had to overcome with his management team, and we just figure that the guy who's done that, and still is a significant shareholder, so focused, will figure his or her way out.”
From what he said last year, it is unlikely that Prem Watsa pushed the change in the management of RIMM. Now the two people Prem Watsa respected have gone, and he himself joined the board. The situation has changed.
This is the holding history of Prem Watsa with RIMM:
He started to buy when the shares were around $50, and he continued to add to his positions with his average cost at about $40 per share. At today’s price, investors can buy the shares at $15, more than 60% lower. The question is, should you?
As we wrote before in What Type of Value Investor Are You?, There are three types of value investors as pointed out by Seth Klarman, those that:
1. Buy cigar butts at good prices
2. Buy great companies at great prices
3. Buy great companies at so-so prices
Prem Watsa is great fan of Ben Graham and clearly is the first type, which Seth Klarman said he himself is also. Warren Buffett has gone through the three stages and is now the third type of value investor, who buys great companies at so-so prices. The reason we think that Prem Watsa is the first type can also be seen from his purchase of the Bank of Ireland (IRE). When we asked the questions in What Type of Value Investors Are You?, many users responded that they would rather be the third type.
So should you follow Prem Watsa into Research-In-Motion? The answer becomes relatively clear. If you consider yourself the type of value investor who likes to buy cigar butts at great prices, Research-In-Motion might be a good choice at this point. It is certainly better than most other cigar butts. If you like to buy great companies at great prices, Research-In-Motion probably isn’t one of them.
Please share your thoughts.