GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Prem Watsa Doubled Down on Research-In-Motion, Again

July 23, 2012 | About:
GuruFocus

GuruFocus

334 followers
Fairfax Financial CEO Prem Watsa doubled down his bet on Research-In-Motion (RIMM). He bought another 25 million shares of RIMM in the last month. As of July 4, he owns 51.8 million shares of RIMM, which is about 9.9% of the company. He owned 26.8 million as of March 31, 2012, which was more than doubled from his holdings at the end of 2011.

Prem Watsa started buying RIMM in the third quarter of 2010, when the stock was traded at $50s and has declined 60% from its peak in 2008. The stock has since lost another 90% while Prem Watsa kept buying. His average cost was about $26 a share before the latest purchase. The latest purchase in June brings his cost per share to high teens, which is still significantly higher than its current price of just below $7 a share.

Prem Watsa is apparently full of confidence with RIMM. At Fairfax Financial Dinner in May, he noted that RIMM remains #1 in many markets. It has $2.1 billion in cash and no debt. Prem is bullish on BB10, the firm has terrific technology, and he notes that Mike Lazaridis is a genius. He also likes Thorsten Heins and remains happy to hold RIM's shares.

Averaging down is one of the secrets in Mr. Watsa’s 35 years of investing. In his last shareholder letter, he wrote: “average down when buying and average up when selling! Illustrated with the case of International Coal, we averaged down from our initial cost of $4.58 per share to an average cost of $3.37 per share. We sold half our position at $7.26 per share (a 115% gain) and only five months later, there was a takeover offer for the whole company at double that price. In spite of not buying only at the low and not selling only at the high, we earned $341.2 million by selling at over three times our cost.”

We have had a lot of discussions of value traps lately. RIMM is considered a value trap as the company continues to lose market share and delay the release of its new products. But Prem Watsa is not an average investor. He is doubling down again.

The question is, will you follow Prem Watsa into RIMM?

Related:

GuruFocus Interview with Fairfax CEO Prem Watsa

What You Want to Know from the Shareholder Letter of Fairfax CEO Prem Watsa


Rating: 4.1/5 (21 votes)

Comments

tkervin
Tkervin - 2 years ago
Well, since Fairfax is my largest position......I guess I am.

It is a gross error in my view. (My fair value vote for RIMM was $5....last fall)

Does this disqualify Fairfax's deflation bet and PM's other investments?

Not in my view but it is troubling.

Is this a great investor being steadfast? Or a man who can't admit error and cut bait?
mocheng
Mocheng premium member - 2 years ago
The guy is a canadian, he will support canadian companies like RIMM forever
ecotycoon
Ecotycoon premium member - 2 years ago
Love that, certainly the best investor in the world, buying part of the business for it's liquiquidation value, low risk good chance of good return. Head you win big tail you don't lose that much.

JJINVEST
JJINVEST premium member - 2 years ago
It might not be a Canadian thing. It could be that he is able to look beyond N. America and see the leading positions that RIMM has in the developing countries and stick to his thesis. After all, this is a company with plenty of cash on hand and a hoard of patents. We are being bombarded daily with news about RIMM in the U.S. We fail to see what RIMM can do in other markets. I wonder if he is investing in RIMM also precisely because at the lower end of the cell phone/smartphone market, RIMM can do much better than, say, Nokia.
ecotycoon
Ecotycoon premium member - 2 years ago
You are right JJinvest, here is a graph of the growth in intangible, RIM make many aquisition of great patents, that is quite a moat on the long term and preserve value for shareholder on the short-term base on liquidation value. RIM use to growt a lot in other market while decreasing in US in the past 4 years but the decline that have start base on that point is worst in the latest quarter look at the graph and it s good news for us because it bring the price of the stock to a realy low level lower than the liquidation value look at the last graph, i made a article on that you should take a look:

RIM Success lies in Paradox

tkervin
Tkervin - 2 years ago
......or perhaps Heads you have the worst investment decision of your life, Tails you don't lose too much.....:-)

At an average price of about $26 per Gurufocus for Prem's stake........hard to frame this as a position anyone would swap into by choice.
Adib Motiwala
Adib Motiwala - 2 years ago
his average will reduce down now as he doubled down. I think it would be high teens now.
pravchaw
Pravchaw premium member - 2 years ago
I guess this is what seperates the true great value managers from the pretenders- ability to remain calm while others run for the exit. However some times there is fire when the fire alarm rings and you can get cooked.

What many investors do not realize that the risk with RIMM is lower now at $7 than it was at $20. Stocks with issues have reverse elasticity of demand - as prices decrease - demand decrease. RIMM's price action is currently mostly emotion (fear) and very little little to do with fundamentals.
superguru
Superguru - 2 years ago
"risk with RIMM is lower now at $7 than it was at $20"

Is Risk not the same? 100% loss.

Upside is definitely more if it turnarounds.

alleygator
Alleygator - 2 years ago
Mr. Watsa's 3rd biggest holding, Resolute Forest Products (formerly AbitibiBowater) is crashing almost as fast as RIMM. Must be a stressful time for him.
ecotycoon
Ecotycoon premium member - 2 years ago
Good point Superguru the ultimate risk is 100%, but you need to take into account probability for the possible outcome. The chance that you loose 100% is quite small because they don't have debt for now, they have cash, trading cheaper than the liquidation value and the management is of really high integrity and honesty.

They made mistake, they realize that, they are now working to try to deliver the best outcome for their shareholder. The management is the one that have the most to lose from the possible outcome, good chance they will try to preserve as much as possible the value of the business and try to deliver the best for the long term.

Projecting good result into the future to make the valuation of a business is really risky because there is chance you will pay too much. On the opposite projecting bad result into the future is also wrong because it limit you from good opportunity at lower risk. Finance is not all about mathematic, finance on my point of view is not a science it's an art, understanding management behavior is quite important.

But still the risk is not 0%, the competition is quite tough in this sector and this is a big risk on that side. Better buy a reasonable portion of portfolio in RIM in order to avoid losing too much, averaging down if stock goes cheaper.

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Academic talk of percentages of risk mean little. Final dollars lost equates to food not able to be put on the table. I.e. There's lots of value fish in the ocean so which is better, averaging down or holding fast but allocating new capital to another fundamentally equal value buy? As such, averaging down sometimes just saves one's sense of skill on exiting in a final bounce.

You have to wonder what Watsa saw back at above $20. And note that he's not loading up at current prices, only doubling up. His conviction is strong but clearly not absolute.
mocheng
Mocheng premium member - 2 years ago
He has a seat on the board now.

RIMM h as 70 million active blackberry users in the world, and still selling like crazy in 2nd and 3rd world countries like crazy.

Hopefully BB10 will come out and smoke apple's ass, although i am also a AAPL investor., oh, they should just smoke nokia's ass
Smmeddie
Smmeddie - 2 years ago
If you look at the institutional shareholders of RIM, you will see that Fairfax owns 15% of the company.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide