Make a Potential 70% a Year on This Smartphone Stock’s Rebound
As surprising as it may sound, Research In Motion (NASDAQ: BBRY), the maker of BlackBerry smartphones, has been making a significant comeback in the mobile computing business as management implements new phones and new marketing strategies.
BlackBerry phones certainly lost a significant amount of respect in the market as Apple’s (NASDAQ: AAPL) iPhone increased in popularity. Research In Motion simply couldn’t keep up despite BlackBerry’s secure business messaging niche.
But things are beginning to change as the company focuses on European and emerging markets, such as Indonesia where BlackBerry phones still have 37% market share. A relatively low pricing strategy and the rollout of a new secure messaging system have brought the company’s products back into the limelight and customers may once again become addicted to the “crackberry.”
Even though iPhone and Android phones still represent fierce competition, investors are buying shares of the stock as the company’s fundamental metrics begin to improve.
Whenever a turnaround is suspected for a lagging company, I want to see clear evidence that the tide really is turning. You can waste a lot of time and capital in false rebound situations where the fundamental metrics have not yet begun to turn.
In the case of Research In Motion, the company has already begun to see an upturn in revenue, as well as profit margins. Take a look at the five-year chart below:
Clearly, the company has seen a dramatic rebound in its quarterly profit margin. And the past two quarters have also shown a rebound in earnings per share (EPS).
Revenue per share has been flat for the past two quarters due to lower pricing on handsets. But this could be offset by service revenue as buyers put the new handsets to use.
On top of the fundamental strength, a quick review of a weekly chart of BBRY shows that it bottomed in the third quarter of 2012 and has been holding well above this level for several months.
During the past several weeks, BBRY has been in a holding pattern as investors wait for the next earnings announcement. The company is scheduled to report earnings on June 28 before the market open.
Given the ongoing strength in emerging markets and the company’s new handsets currently being rolled out, I expect to hear good things from management. The upcoming earnings announcement could be just the catalyst investors need to push BBRY into the $20s.
The uncertainty surrounding the earnings announcement also gives us a very attractive covered call setup with plenty of premium built into the options.
Shares of Research In Motion are currently trading near $14.17. Today, I want to buy shares of BBRY in 100-share lots, and then sell the July $14 calls against the position. The calls are currently offered near $1.40, which means that our net cost for the position would be $12.77.
Remember, we will sell one call contract for every 100 shares of stock we own. Selling the July $14 calls obligates us to sell the stock at $14 if it is above that price when the calls expire in July, giving us a profit of $1.23 for the entire trade.
The beauty of this setup is that even if BBRY trades lower after the earnings announcement, we still have plenty of protection built into our position. With a net cost of $12.77, BBRY could drop about 10% before we would see a loss in the position.
If BBRY continues to hold up as I expect, we will realize a return of 9.6% on the position over a 50-day period. This represents an annualized return of 70% if we are able to continue to set up positions like this throughout the course of the year.
I’m excited about this opportunity to generate tremendous returns in our covered call portfolio. I hope you’re taking advantage of these recommendations as our setups have been performing very well during the past few months.
Please send your comments or questions to Editors@ProfitableTrading.com. I look forward to hearing from you.