Investors from opposite ends of the spectrum are finding common ground at BlackBerry Ltd., (BB-T) as recent online enthusiasm for the tech company boosts the fortunes of long-time backer Fairfax Financial Holdings Ltd. (FFH-T)
Along with the large institutional shareholder are individual retail investors. Many of them, who congregate on websites such as Reddit, have been snapping up shares in BlackBerry and retailer GameStop Corp. in recent weeks. Their purchases, spurred in part by a populist campaign against hedge funds who have shorted the stock and by unsupported claims online, are driving up share prices. BlackBerry’s stock is up fourfold since early January, which values the Waterloo-based company at more than $18-billion.
Toronto-based Fairfax became a cornerstone investor in BlackBerry back in 2013, when the insurer and asset manager led a US$1-billion convertible debenture refinancing. BlackBerry stock was trading at US$6-levels at the time. Fairfax bought into BlackBerry chief executive officer John Chen’s vision of turning the former smartphone maker into a software company. Fairfax founder and CEO Prem Watsa, a noted value investor, became lead director on the BlackBerry board.
Until recently, Fairfax had little to show for its faith, as BlackBerry’s stock price largely went sideways for the past seven years. That changed in recent weeks, as investors who swap stock tips on forums such as Reddit’s WallStreetBets piled into BlackBerry, in part on speculation the company will emerge as leading software provider for autonomous vehicles. Two years ago, BlackBerry struck an partnership with China’s Baidu to develop autonomous driving systems.
Fairfax owns 46.7 million BlackBerry shares and debentures that can be converted into an additional 50 million BlackBerry shares for US$6 each, which adds up to a 17.4-per-cent ownership. In a report this week, Scotia Capital analyst Phil Hardie said every US$1 increase in BlackBerry’s share price, more than US$6 a share, translates into a US$100-million pretax gain for Fairfax.
BlackBerry shares closed Wednesday at US$25.10 on the New York Stock Exchange, up 33 per cent during the session.
“We believe the setup is in place to see Fairfax deliver a string of quarters with large investment gains,” Mr. Hardie said. The analyst said, in his best-case scenario, Fairfax’s stock price could rise by more than 50 per cent this year, if “Fairfax locks in recent BlackBerry gains through hedging or monetization near current market prices.”
Fairfax declined to comment Wednesday on its BlackBerry stake. To date, there are no regulatory filings to show Fairfax has cashed in on any of its seven-year-old BlackBerry investment. A number of Bay Street analysts warned this week that BlackBerry’s business prospects don’t support its current share price.
“The move in BlackBerry’s shares appears to be overdone in the short-term given fundamentals of the business relative to the movement in the underlying share price,” said a report on Wednesday from Bank of Nova Scotia analyst Paul Steep, who has an US$8.50 one-year target price on BlackBerry. He said: “The recent surge in the value of BlackBerry’s shares appears to be driven by retail investors focused on a handful of stocks using a combination of purchasing near-dated call options and the underlying security.”
Mr. Steep said while BlackBerry has promising technology and a strong balance sheet that will help it weather the pandemic, “we would need to see a material improvement in the firm’s performance within its software businesses to become more constructive on the shares.”
The rally in BlackBerry shares, while impressive, pales beside the recent run at GameStop, which sells video games through a network of more than 5,000 stores. GameStop shares jumped 134 per cent on Wednesday, closing at US$347 on the New York Stock Exchange, after starting the year at US$18. The retailer is now worth US$24-billion, roughly the same as the combined value of Canada’s two biggest grocery chains: Loblaw Cos. Ltd. and Sobeys parent Empire Co. Ltd.
A number of U.S. hedge funds that were previously short selling GameStop – betting that the company’s stock would drop as it battled rivals such as Amazon.com Inc. – closed their short positions over the past week after taking significant losses.
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