Fairfax’s Prem Watsa More Than Doubles His Position in Research-In-Motion
We asked our readers the question "Should Value Investors Follow Prem Watsa into Research-In-Motion?" The responses are far from enthusiastic. As pointed out by the readers, Research-In-Motion faces strong headwinds, and the demand for any tech products can evaporate quickly if a better product surfaces.
Before the recent purchase, Prem Watsa’s cost for RIMM was about $40 a share. The latest purchase will bring his cost down to about $25 a share. The stock is now traded at about $16. The stock has lost about 90% of its market cap since June 2008.
A look at the historical earnings of RIMM reveals some interesting phenomena about the stock market. For fiscal year 2008, when RIMM earned $2.3 a share, the stock was traded at above $140. For the past 12 months, the company earned $4.25 per share, but the stock was traded as low as $14. Of course, the outlook for Research-In-Motion has lost all of the brightness that it enjoyed in 2007. But is the stock market all about the future and outlook?
When everything was fine and bright in 2007, RIMM was traded with a P/E ratio of more than 100; today it is about 2.86. Apparently most investors think that the earnings power will continue to decline, maybe dramatically, and the company is heading toward death.
Prem Watsa certainly does not think so. He personally joined the board, and invested an additional $250 million in the company. Again, will you follow him into the company? Is RIMM cheap enough for you?
As we write this, Apple Inc. (AAPL), the company that killed RIMM, again claimed the title of the world’s most valuable company. Compared with RIMM, even at today’s price, APPL is traded at a P/E of around 16. If Apple enjoyed the same level of P/E ratio of RIMM at its highs, the market cap of Apple would be around $4 trillion, or 25% of U.S. economy.
From this point, Apple seems to be quite undervalued, considering its phenomenal annual earnings growth rate of more than 50% a year. Five years back everyone was excited about their new Blackberry. Today people can’t live without their iPhones and iPads. An unthinkable question is what if one day Apple’s growth slows down and iPhones and iPads are being replaced by something even fancier?
That mysterious Mr. Market!