Although Blackberry has vocal detractors, Koza believes that the company has the potential to prove skeptics and critics wrong, provided they meet a few major milestones in the near future. Mike has an impressive track record of generating great returns when his stock selections go from ignored and undervalued to popular and fairly or even overly valued, and he’s optimistic that he’s picked another successful value stock with Blackberry.
Over the past 13 years, Mike Koza’s Marketocracy portfolio has averaged more than 19% a year by investing in 333 stocks and making money on over 61% of them. Over the same period, the S&P 500 has averaged a little more than 5% per year.
One of Mike’s top five holdings is Blackberry. His Marketocracy model portfolio has averaged 19% a year for 13 years.
Ken Kam: Mike, you have a history of buying value stocks before something happens to change the market’s opinion of them. What do you see in Blackberry?
Mike Koza: I chose this stock largely because of the range of BlackBerry® 10 devices that they put on the market, which received good reviews. They haven’t been wildly successful at reclaiming lost market share in the smartphone space to date, but they do show a trend toward addressing some of the issues users have had with the phone and its OS. In addition, Blackberry has a lot of assets right now, especially cash, but also patents, the Blackberry Enterprise Server, and Blackberry Messenger (BBM), which is going cross-platform making it available to Android and iPhone users as well.
Ken Kam: Since you’ve bought into Blackberry, the stock price has declined, right?
Mike Koza: Yes, after I bought in, the value got a little better so I added to my position. Since then, the market has driven down the price of the stock to around $5 for a while. It’s now back above $7. This kind of volatility always happens to companies in turnaround so I’m not concerned. The same thing happened when I bought HP (NYSE: HPQ). It went down to $11, and I bought more. Now it’s trading at around $32. I bought into Blackberry because I believe they are going to stabilize and have the potential to grow.
Ken Kam: How much of your portfolio is allocated to Blackberry right now?
Mike Koza: About 10-12% of my portfolio is in Blackberry right now. That’s about as big as I ever go with my portfolio positions.
Ken Kam: So, what do you think Blackberry has to do to double in value?
Mike Koza: First, they have to fix their cash flow issues by stabilizing the company. Right now there are no real earnings, and revenues are down. As soon as Wall Street begins to feel confident in Blackberry’s ability to reduce losses per quarter and achieve breakeven, we should see a fairly quick uptick in stock price because the price has been so depressed recently.
Ken Kam: And about how long do you think it will take to accomplish this?
Mike Koza: I think that if John Chen, the new CEO, executes successfully on his plan, we could see the stock double by this time next year, give or take a quarter. Last quarter, they didn’t really lose any money—they had a valuation adjustment—and came close to breakeven. As they stop losing cash and the dust settles from their patent litigation and contract negotiations, I think we’ll start to see the company turn around quickly. I don’t normally buy growth stocks, but I think this one might have the potential to become a growth stock.
Ken Kam: What do you see as Blackberry’s biggest asset right now?
Mike Koza: Well, I see two things. They have approximately $2.7 billion in cash, which is strong, and I am very interested in the future of Blackberry Messenger (BBM). BBM has around 80 million active users, and from what we’ve seen recently with the $19 billion acquisition of WhatsApp by Facebook (NASDAQ:FB), some companies place a high value on subscribed user bases and audiences in the mobile messaging space. While BBM’s user base is one-fifth the size of WhatsApp, its market cap is less than one-fifth of what Facebook paid for WhatsApp. For the right buyer, BBM alone could justify acquiring the whole company. It caught almost everybody in the market off guard just how much Facebook was willing to pay for WhatsApp’s community, and we know there are other big companies looking to capitalize on the mobile trend. I think there is value in BBM.
Ken Kam: Do you think that John Chen is the man for the job?
Mike Koza: I do. He has a good track record. Most recently he was at Sybase Inc. and led the company through a reinvention phase. The task ahead of him at Blackberry is quite similar to what he successfully faced there.
Ken Kam: What questions do you have that might yield answers that would help solidify or change your opinion about Blackberry?
Mike Koza: That’s an interesting question. I suppose one of the questions I am most interested in learning the answer to, which would influence my beliefs about Blackberry, is how vital an asset is BBM? I don’t use instant messaging or text messaging much in my personal life, so I’d be interested to know if the messenger network and its users are a true asset to the company. Particularly in light of what just happened with WhatsApp, it would be good to know if someone would pay for Blackberry’s instant messaging user base, and if so, how much.
Ken Kam: That’s a great question, Mike. We will take that to our investment research community and get their thoughts on the subject for Part Two of this article series. Anything else that you’re interested in gaining some additional insight about?
Mike Koza: I am very interested in the rationale for continued use underlying the remaining Blackberry user base. We’ve seen market share loss over time in competition with other smartphones, but there is a pervasive loyalty found in remaining Blackberry users that I find thought provoking. I wonder what drives it and what aspects of the products—particularly the new line—these individuals find so compelling. I’d like to know what their brand loyalty is attributed to. Identifying an answer to this question might shed some light on how much more valuable the BBM network could become.
Ken Kam: I agree. These are great questions to ask, and we will report back on our findings from the research community. You’ve convinced me that there is a case to be made that BBRY has the potential to double, and I look forward to hearing additional perspectives from other investors with long-term track records.
Mike Koza is a civil engineer in California who has an investment style similar to Warren Buffett’s. He runs a value portfolio for our clients in which he works toward the objective of significantly outperforming the S&P 500 over the long term. Underlying this strategy is the belief that the market overreacts to good and bad news about companies, resulting in stock price movements with no direct correlation to a company’s actual value. Purchasing undervalued stocks low and selling them high is the primary goal. Over the past 10 years, his Marketocracy track record shows an annualized return of 19%.
Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.