{"id":33818,"date":"2012-11-28T10:52:29","date_gmt":"2012-11-28T15:52:29","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/11\/beware-the-crap-rally\/"},"modified":"2012-11-28T10:52:29","modified_gmt":"2012-11-28T15:52:29","slug":"beware-the-crap-rally","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/11\/28\/beware-the-crap-rally\/","title":{"rendered":"Beware the Crap Rally"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

The last few weeks have seen a rally in\u2026well\u2026for lack of better word, \u201ccrap.\u201d<\/p>\n

Before Tuesday\u2019s correction, Research in Motion (Nasdaq: $<\/span>RIMM<\/a>)<\/strong> had risen 37% since just the beginning of this month and had nearly doubled from the low hit over the summer.<\/p>\n

Facebook (Nasdaq: $<\/span>FB<\/a>),<\/strong> the company that may be remembered as the most disappointing IPO in decades, is up more than 36% in just the past two weeks.<\/p>\n

Even Dell (Nasdaq: $<\/span>DELL<\/a>), <\/strong>the perpetually cheap PC maker that has struggled to stay relevant in the age of cheap Chinese competition and from upstart tablets and smartphones, has shown signs of life. The stock is up 13% in just the past week and a half.<\/p>\n

What\u2019s going on here?\u00a0\u00a0 Do investors really see value in these tech disappointments, or is this just the mother of all short-covering rallies?<\/p>\n

It\u2019s a little of both.\u00a0 Let\u2019s take a look at each company separately.<\/p>\n

Research in Motion has been a real frustration to me as a former bull.\u00a0 This was the company that invented the smartphone and as recently as a year ago could have remained the dominant player in the corporate market had they played their cards right.<\/p>\n

Alas, they didn\u2019t play their cards right.\u00a0 In fact, they didn\u2019t really play their cards at all.\u00a0 For the life of me, I can\u2019t figure out what the company has been doing for the past two years.\u00a0 BB10\u2014the new operating system that is supposed to compete with Apple\u2019s (Nasdaq: $<\/span>AAPL<\/a>)<\/strong> iPhone and Google\u2019s (Nasdaq: $<\/span>GOOG<\/a>)<\/strong> Android phones\u2014is scheduled to be released in February of next year.\u00a0 That\u2019s almost a year later than originally planned, assuming they meet the deadline.\u00a0 And given the company\u2019s recent history, that is not a certainty.<\/p>\n

You almost have to work to screw things up as badly as RIMM did.\u00a0 \u00a0Even after the company started to fall behind its rivals, it had assets of real value.\u00a0 Its BBM messenger is still the best texting and instant messaging program on the market, and it could have been monetized as a standalone app for sale in the Apple and Google app stores.\u00a0 But it wasn\u2019t, and every day that passes it becomes less relevant as its pool of current users dwindles.<\/p>\n

I still see value in RIMM’s Mobile Fusion platform, which allows corporate IT departments to manage iPhones and Androids on the equivalent of a BlackBerry Enterprise Server.\u00a0 But there is a very significant risk that the company will fail before they have time to fully develop this.<\/p>\n

RIMM still looks cheap\u2014on paper.\u00a0 It has roughly $2 billion in cash and an estimated billion or so in patents.\u00a0 Backing these out, the value of RIMM as a going concern is currently only about $2-3 billion.\u00a0 A good activist investor could buy RIMM, chop it into pieces, and sell off its parts at a profit.\u00a0 But before that happens, management will probably destroy a lot more value first.<\/p>\n

It\u2019s simply too late for BB10 to save RIMM.\u00a0 A year ago, I think it would have had a chance.\u00a0 But at this point, the company has too much baggage, and they are fighting for turf among the business crowd with a resurgent Microsoft (Nasdaq: $<\/span>MSFT<\/a>).\u00a0<\/strong>(See “Microsoft Will Crush Google<\/a>“)<\/p>\n

Don\u2019t get drawn into RIMM.\u00a0 It\u2019s a sucker\u2019s rally.<\/p>\n

But what about Facebook?<\/p>\n

My wife and I have a rule of thumb for technology products.\u00a0 Once our respective mothers use it, it\u2019s over.<\/strong>\u00a0 This is not to say that the company is going out of business, but its high-growth phase is clearly over.\u00a0 When our mothers are using it, there is no one left to join.<\/p>\n

Well, both of our mothers are now avid Facebook users.<\/p>\n

You should take my \u201cMother Indicator\u201d with a grain of salt, of course.\u00a0 But given that Facebook trades for 40 times next year\u2019s expected earnings, my concerns about growth start looking valid.\u00a0 Facebook\u2019s profits would have to grow at torrid pace in the years ahead for that valuation to be anything short of ludicrous.<\/p>\n

Zuckerberg & Co. are anything if not creative (\u201cruthless\u201d is another word that comes to mind), and I have no doubt that Facebook will find new ways to monetize its assets.\u00a0 But the company depends mostly on paid advertising, which is not a proven model yet in the world of social media. \u00a0And rival Twitter seems to be getting more buzz these days.<\/p>\n

Facebook is a $50-billion company with a questionable business model trading at a nosebleed valuation.\u00a0 If you buy it, you are betting big on Zuckerberg\u2019s ability to innovate.\u00a0 I\u2019m not willing to make that bet at current prices.<\/p>\n

Finally, let\u2019s look at Dell.\u00a0 Dell is a good company in a terrible industry.\u00a0 They make good computers and laptops, but both are commoditized products.\u00a0 There simply isn\u2019t much premium to be charged for selling a \u201cgood\u201d PC these days. \u00a0All of the profit goes to Microsoft, the maker of the operating system, and Intel (Nasdaq: $<\/span>INTC<\/a><\/strong>), the maker of the processor.<\/p>\n

That said, Dell is ridiculously cheap, even for a seller of a commoditized product.\u00a0 It sells for just 6 times expected 2013 earnings and for just 0.29 times sales, and at $9.77 per share its price is barely above the crisis lows it hit during the 2008-2009\u00a0 meltdown.<\/p>\n

Dell also has no net debt, a respectable return on equity of 27%, and a dividend of 3.4%.<\/p>\n

There is a lot of bearishness towards Dell for the same reason that there is a lot of bearishness towards Microsoft and Intel.\u00a0 Computers are no longer a growth industry. While I consider them far from \u201cdead,\u201d tablets and smartphones are creeping deeper and deeper into territory once dominated by PCs.\u00a0\u00a0 Investors simply have no interest in owning shares of yesterday\u2019s tech darling.<\/p>\n

And herein lies a potential opportunity.\u00a0 Dell is interesting contrarian value play.\u00a0 If you believe, as I do, that there is plenty of room for PCs, tablets, and laptops on the desks and in the lives of most consumers, then Dell should have a viable future.\u00a0 And given that no one\u2014as in not a single investor I have met in years\u2014has any interest in owning Dell right now, your downside should be tolerably low.<\/p>\n

If sentiment improves even modestly towards PCs, Dell could be an easy double over the next 12-24 months.<\/p>\n

Disclosures: Sizemore Capital is long MSFT and INTC. \u00a0This article first appeared on InvestorPlace<\/a>.<\/em><\/p>\n

The post Beware the Crap Rally<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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