@Royal_Arse Asks

Nature, Sports, & Money: Cycles of Life.

Tag: investing

Blackberry Valuation Study: What is $BBRY worth?


I love the keyboard and email!

Update (25-Sept-2013): Fairfax came in with a sweetheart $9 bid for BBRY not 4 trading hours after they announced horrible results and material staff reduction as part of broad restructuring.  As suggested below, BBRY is worth $7-9. Thanks to Prem Watsa et al for validating the following fundamental analysis.


Having lived in Southern Ontario my entire life, and worked briefly near Waterloo-area Blackberry (formerly RIM) headquarters I am very frequently asked my opinion on the stock price.  Mostly I tell people to ignore it, and sell if they own, but more on that later.

Throughout the agonizing drop from pinnacle of the mobile phone pantheon BBRY has always been top of mind.  The goal of this post is to KISS and answer the question in the title: what is the stock worth?

During early 2010 the nascent post-GFC recovery pushed shares of BBRY upwards from ~$40 bottom to reach $60-80.  After this run I started advocating employees of RIM, and other holders of the shares, divest themselves in favour of the iPhone-producing Apple $AAPL (for the risk takers) or cash (for those less apt to stay in the market).  Since then, as we all know, RIM dumped their founders Jim & Jim, overhauled their branding, and oh yea, watched their stock price drop ceaselessly from $80 to $10.

What is the true value of BBRY shares?

To find the rock-bottom valuation we’ll use tangible book value (TBV).  This strips out many assumptions that go into valuing a business as a going concern by assuming the worst: BBRY will immediately enter bankruptcy, never sell another device, or collect another nickel from subscribers (which is not going to happen anytime soon).

Using this hypothetical scenario gives us the most basic and reliable valuation.  By adding together the Co’s real assets and subtracting their long-term debt we find BBRY tangible book value (TBV) is roughly $7.

To find this value we add two their 2 core assets: cash + real estate ($5.86 + $1.31 = $7.17) and then subtract LT debt ($0) to arrive at TBV of $7.17.  This is the theoretical minimum price at which shares should trade around.

As a value investor, it would thus be prudent to buy BBRY if and only if it trades below $6, which will likely to occur IMO sometime in tax-loss season (Nov/Dec 2013).

What about Book Value?

Plain old book value (BV) incorporates some assumptions into our valuation, specifically intangible assets and cash flows.  The resultant mixture of data muddies the waters as the value of these elements is less clear and reliable.  Adding in these murky elements has ramification on the range of potential valuations and should evoke more scrupulous analysis of the figures below.

Why Bother?

Some investors would stop here and proclaim that value is only found below $6 per share and that anything higher is rip off since BBRY is a complete disaster and they have no chance to survive since their sales are about to vapourize.  Maybe so.  However valuing BBRY as going concern is only fair given they have millions of customers which generate +$3 Billion in sales every 3 months!  It’s not the struggling coffee shop in Miramichi, New Brunswick but a massive global enterprise.

Taking a fair outlook on their future business prospects by assuming a significant, but not catastrophic, decline in operational cash flow will boost the value per share.  Additionally,  we must add the other intangible assets like patents & intellectual property to round out our KISS study.

Starting with the latter, intellectual property & patents where some analysts have suggested BBRY owns $4.00 per share worth of assets.  Adding $4 to TBV makes a potential stock price of $10-$11 seem reasonable.  However, over the course of the past 6 weeks shares have traded for ~$9 (ignoring the huge leg up over last few days).  This is our first of 2 example of the market doubting BBRY through ‘discounting’.  By discounting their intangible assets (and cash flow, as well see below), the market doesn’t view the patents value as $4, but more like $9-$7 (Stock Price -TBV) = $2.

You might ask, “Why is the market doubting the patent values and not the cash or RE value?” and the answer is simple: assets which are easy to value (cash & RE) are discounted LESS than that which is complex or valued less reliably (patents etc).  We can be fairly confident that TBV is more static and reliable than BV for this reason.

Furthermore, the market is fully discounting cash flow that BBRY generates. Analysts from CIBC modelling their cash flows over the next 5 years and suggest — even with considerable drop off in sales and subscribers — BBRY generates $2 bil/year, which adds $10 of value to each share.  The market, however, is calling BS and is valuing BBRY operations at $0.  Using these optimistic assumptions, some firms have $20 price targets.

This is a mighty kick in the groin to a former titan of the mobile industry, but investors might view this as a sign that market is wrong and has undervalued BBRY since you can buy the assets of the business and get the cash flow for free.

Note the previous recommendation of staying away until BBRY sells for around $6 still hold to ensure margin of safety and reasonable rate of return to compensate for risk.  Will it ever regain former glory?  No, at least this author is highly doubtful.  Will it reach $6 per share or less?  Yes, I believe it will before Xmas this year, but what the hell do I know?

So, what do you think $BBRY is worth?


Equity Style Variance As Tool for Tactical Asset Allocation


There is plenty to observe in this chart. The primary thesis is summarized in the top right hand side: does buying by value investors (relative to all stock investors) indicate a high likelihood of stocks outperforming bonds? Over the past three years there is some evidence that eager buyers of value stocks signal bottoming in broader stock market, thus sell bonds, buy stocks.

Financial Planning & Wealth Management Strategies: Earnings Referrals

Client referrals are a great way to build a strong investment business. Unfortunately, a roster full of satisfied clients does not directly prompt them to boast about your services to family and friends.  A simple solution is to be more proactive by readily asking for referrals following every successful client meeting.  It’s critical to be open about your desire for referrals and always ask for business, but there is a more nuanced approach to growing your business through client-generated leads.

 “Women who are loyal to their financial advisors refer twice as much as men.

Advisors would be wise to shape their conduct with couples and female clients around this remarkable yet unsurprising fact.  Women are generally more social and likely to share information that men may view as personal or private; financial matters inclusive.  Acknowledging this social dynamics’ impact on who is apt to refer, and why, may remedy the problem of a lack of referrals.

Characterizing an advisor as fit-to-recommend doesn’t fully explain why some are more successful than others at earning referrals.  In addition to being proactive, advisors who frequently generate referrals connect with their female client base more effectively by utilizing a remarkably obvious, yet forward-thinking approach to managing money: establish rapport equally with every client.  They build financial literacy, comfort and trust across the board, but with women especially, through a combination of sound advice, basic and complex tools, and great interpersonal skills.

 Comfort & Trust = Rapport

Are satisfied clients more apt to describe their advisors as trustworthy and caring, or bright and diligent?  While all are desirable traits, clients are more likely to speak of their experience with advisors from an emotional base.  Thus for advisors connecting emotionally – a strength of women relative to men — can be more important than delivering a whip-smart presentation on a great investment opportunity. The decision-making process is determined more by rapport than recommendation, same goes for earning a referral.

Given that 90% of women report feeling insecure when it came to personal finance, and 48% of women agree with the statement, “Investing is scary for me”, there are enormous opportunities.  To fill this gap advisors need to integrate sound financial advice into a dedicated process, communicated with the aid of high- and low-tech tools.  The process must be sensitive to who clients are and the purpose of their meeting, nevertheless it’s beneficial to adhere to routine in conjunction with the following three core principals described by Kathleen Burns Kingsbury (expert on giving financial advice to woman full article here).

  •  Analyze 

“Your job is to find out where your client’s deficits lie and to develop a plan for building these areas.”

  •  Build     

“Financial intelligence is the sum of your financial literacy, money skills, and the ability to understand what you think and feel about money and wealth.”

  • Coach

“Be as creative and collaborative as possible during the building phase, often clients have wonderful ideas on addressing their problems”


Using these core objectives to guide the advice experience will boost clients’ financial esteem through more vigorous participation.  Use props (many banks have Life Cards) to provide a helpful visual anchor for clients when more complex planning concepts are explored.  They expand the dialogue as engagement levels rise for couples, men and women alike.  Remember, the means of extracting information from clients — your process, language, and rapport – is enormously impactful on their satisfaction level and the likelihood of being referred.  Rather than drawing dry questions form a rout list to understand your clients be creative and collaborative.


Being proactive and smart about your process from start to finish will boost productivity and yield strong long term results.  When following up, divide your time equally between both spouses; but insist on speaking with Mrs. Smith to remind her you’d be honoured to assist their friends and family with their investments.

Questions to Consider:

  1. Does this imply that female advisors are more successful at obtaining referrals?
  2. How should this impact the composition an advisory team if true?
  3. Would the dynamics matter to a newer business looking to grow more so than to a mature business?
  4. What does that say about potential Planning/Advisor partnerships in general?
    1.  Is there a meaningful difference between teams partnerships?
      1.  male-male vs. male-female vs. female-female

Twitter Quarrels with StockTwits over Cash Tags $$

“From ancient grudge break to new mutiny,
Where civil blood makes civil hands unclean.
From forth the fatal loins of these two foes
A pair of star-cross’d lovers take their life”

The announcement that Twitter reclaimed the cashtag [$tag or ‘$’] from StockTwits brought about a unique cocktail of personal feelings.  Upon learning this long-standing agreement was terminated — as an avid user and bull on the company who was fortunate to lunch with CEO Howard Lindzon — it struck me as monumental.

First take for most is something like “Twitter kneecapped StockTwits”.  Others claim that StockTwits is just a copy-cat anyway and they don’t desire cash-tag exclusivity.  Whatever  StockTwits is/was has just been disrupted by Twitter.

The decision to reclaim the cash tag $ is a move sure to incite a saga akin to tortured, passionate lovers abruptly parting ways: intermittent fireworks amid the grinding emotional decay.  With a single conspicuous tweet on Monday night the break-up was broadcasted:

Stocktwits built a community through curation of tweets containing tags like $GOOG, $SPY and $AAPL and combining it with other relevant financial information.  Their tools are top-notch for investment professionals seeking info on stocks, ETFs etc.  An impressive network of professionals generating content fosters a smart culture and pleasurable user experience.

I met CEO Howard Lindzon in Spring 2011, a period encapsulating my search for new professional challenges while coping with my own heartbreak suffered days prior.  It is singularly most intense period of my life.  I hadn’t eaten much in days, sleeping poorly and struggled to reconcile my desire to evolve with yearning for familiarity. Nothing like a meeting with an influential entrepreneur to jostle things into place.

Battling my position in the matrix of modern society I strolled through the rain in Toronto.  With plans to meet for coffee, I sat down nervous, malnourished and wet in a Sushi restaurant across from the CEO of a multi-million dollar tech company. Blankly gazing at the menu trying not to choke on my tongue I demanded a black coffee.

Black coffee, on an empty stomach, in a sushi restaurant.  Howard orders 6 items and looks across the table, “We’ll share.”

Fuck it, let’s do lunch.

The raw fish and general distress caused my focus to be off somewhat, but we engaged on social media, technology, venture capital and investing, the media, and most specifically StockTwits.  What is it, and how can I get involved?

His goals were not modest.  Stocktwits was about the community, its growth potential limitless thanks to effective presentation and curation of cash-tag generated news feed.  Stocktwits attracts a strong demographic increasing the likelihood it could sustain itself with ads, should they avoid being acquired.  He was dialed in on their initiative to become a world-class Investors Relations platform.  Exit strategies? Imagine being worth a fraction of the $20Bil valuation they put on Twitter? Maybe Yahoo Finance places a bid, or a struggling print publication looking for ready-made digital jumps in?  What about Twitter bidding themselves?

What About Twitter?

My gut burned with the niggling idea that Twitter was driving the bus in the whole operation.  Although Howard guarded plans to expand and future partnerships, we acknowledged the plain fact StockTwits — in some form — depended on a 3rd-party source:  Twitter.

With the recent announcement any visions of the utopian scenario in which Twitter is the White Knight Acquirer, have been blurred.  Twitter has chosen to be adversarial, much the way they confronted Tweetdeck when they built upon Twitter infrastructure to improve the user experience.

What about a patent?
If Twitter eliminated the accommodation provided to StockTwits via $ curation, what happens to their business model?  Distressed and beleaguered I do not recall a firm declaration either way on the legal recourse StockTwits may possess should Twitter withdraw their access.    It only percolated to the surface how precocious their venture may be before it was whisked away like the sashimi tumbling into the vacuous gorge that was my stomach.

Now its right in front of their faces.  Twitter dropped a bombshell and broke it off with Stocktwits.  Howard has publicly responded in a blog post here. While this debacle has gifted StockTwits.com a short-term boost in traffic, the end game is unknown.  Can they reconcile, or has their relationship suffered irreparable damages?

Does StockTwits have the stones to look upon the hand that feeds and place a civil action into its grasp? I have no inside knowledge into the outcome, but my suspicion is that legal action is unlikely at this point.  Primarily because of the potential costs of litigation, but alternatively since the response from Mr. Lindzon lacked any indication that a contract, or agreements in principle, had been violated.  It suggests that the original relationship between StockTwits and Twitter was established verbally and not formalized, whatever that means in court…

Lastly, I believe legal action is unlikely because StockTwits is a great product with a strong team that will continue to innovate and deliver.  The site remains up and running with most of its functionality intact.  There is always hope that loves springs eternal, a spark might rekindle their fire, but Howard, Phil and the crew are surely confident they can stand alone and thrive.  Business as usual.

Sports Stadia: Seattle Going Down the Rat Hole

Even during wholly prosperous times publicly subsidized sports stadia are a bad idea.  The literature is clear on this as I have shown previously.  Despite the body of work demonstrating that building sports stadia does little-to-nil for the local economy, every few months another politician in North America trots out drivel in favour of robbing their constituencies purse to erect a monument in honour of their ignorance.

When you integrate financial realities of these projects with the current macroeconomic environment of high debt levels (individuals & public/municipalities) and poor household disposable income growth, its obvious that private businesses should finance these infrastructure projects, not taxpayers.

Seattle: Politicians Seeking Fame & Notoriety. 

Private investor Chris Hansen and his yet-to-be-revealed partners have proposed building and operating a pro basketball and hockey arena in Seattle’s SoDo area.

Minor flaw in their plan: they don’t have the money to fund these ambitions.  Rather they are attempting to coerce the public into subsidizing their arena-building endeavour “in the form of municipal bonds totaling hundreds of millions in public debt backed by local governments.”

Analysts from UBS visited the discussion with a lengthy piece on the merits of investing in the bonds that are created to finance sports stadia construction.  Generally, they conclude in an almost conciliatory statement what readers of this blog have long known:

“Unfortunately, independent academic research studies consistently conclude that new stadiums and arenas have no measurable effect on the level of real income or employment in the metropolitan areas in which they are located”

“There is no broad economic benefit from most sports stadia, rather public financing props up the ever-inflating value of privately-owned sports teams”

They go on to discuss the ‘Cycle of Construction’ of sports stadia and describe how politicians are increasingly captured by the sexy appeal of being a ribbon cutter.  Despite most sports stadia being privately owned prior to WWII:

“Many of the stadiums built after the Second World War were abandoned in favor of more modern facilities. By the end of 2012, 125 of the 140 teams in the five largest professional leagues (NFL,MLB, NBA, NHL, and MLS) will play in stadiums constructed or significantly refurbished since 1990.”

The majority of these projects are financed with public funds.  To ensure the public play along in this income-redistribution scheme, the cities pump out feasibility studies propagating mythical economic realities.  The flaw in these studies is explained perfectly:

Feasibility studies for professional sports facilities often fail to account for the substitution effect. Individuals generally maintain a consistent level of entertainment spending so money spent on sporting events typically comes at the expense of cash spent in restaurants, on travel, and at movie theaters.

The substitution effect is particularly meaningful during a deleveraging period in which average consumers have limited disposable income.  The piece-of-the-pie allocated to traditional entertainment is very low for most families in 2012.

That means that after taxes, debt repayment, food and other mandatory costs-of-living these 40-50x yearly events (41 reg seasons game for NBA/NHL teams) far too often run under capacity.  This is why leagues are embroiled in revenue sharing agreements that suck profits out of the successful teams to subsidize the fiscal laggards.

As the majority of revenue for the NHL/NBA is gate-driven its paramount to understand how butts in the seats equal profits.  In other words, household disposable income growth + winning = financial prosperity.

[Aside: In contrast to the NFL who can support its bottom quartile teams with their share of the enormous TV-related revenue.  As some have speculated, you could host NFL games (8-10x annual events) in a 3000-seat TV studio-turned-arena and they would still be the most profitable sports league in North America.]

Cost Centres Breed Taxation
The debts created to build these stadia are repaid primarily by created new taxes.  For example, hotel & rental car surtaxes are implemented on all visitors, and boosted general sales taxes increasingly cast an accretive net over the money spent by non-sports-fan consumers in town for business or leisure.  This additive disincentive is hardly a means to improve commerce in a given municipality over the long run, a fact which is either misunderstood or ignored by the folks who approve these stadia deals.

When the public demands more due diligence, like they have in Markham, the council slams the door on transparency in the name of expedition.  Rather than allow all the members of council to become involved in the process, they have voted for a smaller, more nimble special committee to go ahead and call the shots:

Deputy Mayor Jack Heath expressed anxiety about the “urgent” nature of the project and the tight timeframe required to have the facility finished by fall 2014.
“We need to get going on this,” Mr. Heath said.

The lack of incentives for civic leaders to spend wisely has never been more apparent.  Sports fans and citizens alike should not allow these actors to allocate their tax dollar on toys, when the funds are spent much more productively on roads, bridges and public transit.

I guess everyone is comfortable paying higher property taxes so long as owners and athletes come to town and pocket the difference?  Probably not, but prudence and logic will not stop these impregnable project from being undertaken at the peril of the community.

Hot Money & Glacial Migration: US GDP to Melt Your Face Off…Slowly

Regardless of their style smart investors take great care in knowing how the Worlds’ largest economies are functioning at a given time.  Whether you accept the Euro crisis as being wholly unresolved or not, the upcoming volatility will erode economic strength as if leaves were dropping off malignant trees throughout Europe.  The blight of debris covering the underlying soil will smother the growing buds with the haste and devastation of a German Autumn-turned-Winter.

However, drawing from recent history I expect the reverberations to be dampened in the near-term (H12012) as bailout cash is bazooked, firehosed and helicoptered onto Greece via the ECB, which should allow the USA to grow modestly in the interim.  For more on a troubled Europe see this recent analysis from Robert Sinn, the remainder of this post will focus on potential for growth in the US in spite of headline risk elsewhere.

Jelly Bean Jar Contest: Guess the Sum

2011 IMF estimates for Global GDP (nominal, $USD) show the Eurozone controls ~1/4 of the global economic activity ($17 Trillion annually; 25.65% of Global), with the USA close behind producing over 1/5  ($15 Trillion ann., 21.5% share)

Much like Wall Street forecasters, I expect H1 2012 to be slightly positive for the US economy (1.5-2% growth) and there are numerous reasons for this:

  • Election Year + Normal positive seasonality
  • Tepid Inflation
  • Healthy trends in employment and industrial production (expanding PMIs)
  • Rotation into growthy sectors, commodity strength on back of soft-landed China?

Additionally, we are 5-to-6 years deep into the US housing crisis and finally seeing some ‘Green Shoots’:  Construction spending is no longer declining and initial unemployment claims continues to leak lower.  Most experts are in agreement that there is no longer significant downside risks to residential housing.

US Total Construction Spending  Chart


This screen shows many in the General Building Materials category are performing respectably in H22011, a trend that should accelerate in H12012 assuming slow, but positive growth manifests itself in the US economy.

We also have indications of growth coming in the form of increased basic materials prices, which traditionally occurs concurrently with positive returns for stocks: http://chart.ly/p4ukkkh

The increase in commodity prices may be attributable to sector rotation as asset managers bail on their high-yielding dividend stocks for more growth-oriented fare.  Whatever the explanation risk appetite is being priced into the market.

The risks are clear: any slip up in Europe causing significant distress to the financial system and subsequently confidence render the above data null.  However, many smart macroeconomic analysts are constructive, if not outright bullish, on the US economy near term and the bearishness coming out of Europe shouldn’t fully dissuade risk-taking activities across the pond.


Robert Sinn: “Sage Weekly Letter” — http://www.robertsinn.com/2012/01/08/sage-weekly-letter-9/

US Total Construction Spending Chart by YCharts

Bloomberg EconBrief — http://chart.ly/users/EconBrief

Wikipedia – IMF Global GDP forecasts http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)



Demographics, Asset Allocation and Bond Bubbles

I was having cocktails with a bunch of financial planners and investment advisors recently and the oldest-of-old money management axioms was readily bandied about:

“Asset allocation should be determined by ones age: match your weighting in bonds/cash to your Age, make up the difference in stocks.”

While this old saw has many interpretations that will be exploited by great planners, the broader implications are clear: as boomers age their Marvin Milktoast advisors will continue to pound the table on the merits of investing in fixed income in ample proportions.  Your 70yo clients will invest $700,000 of their $1MM in bonds/cash and sprinkle the remaining $300000 around in the equity markets.  Foolproof right?

The detractors will caution of a bond bubble given the uber-low rates and distress in European sovereign credits.  Others worry bond yields pushing on the lower-bound thanks to ZIRP and #lowforlong themes have distorted the whole space causing them to avoid the space. 

But how much of this is rhetoric, what does the data tell us? 

Quite possibly my chart of the month: Nations with Younger Po... on Twitpic

For an answer see the commentary from Jerry Khachoyan ( @armotrader here: http://jerrykhachoyan.com/bond-rates-low/ ).  The post is accompanied with many helpful graphics that illustrate the reality: bond prices can and likely will stay elevated for some time as slow economic growth fueled by deleveraging and demographic headwinds will temper the appetite for equities. 

Unless the wealthy, aging and mostly ignorant developed world start to disobey their financial advisors advice, we’re all turning Japanese.

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