RIMM Investors: Understand There Is 'Cheap' and 'Stupid Cheap'

NEW YORK (TheStreet) -- There are a lot of similarity in shopping for groceries and shopping for stocks. Likely the most obvious is that though everyone wants a bargain, too often shoppers don't know how to spot one. As tough as it is for investors to try to assess stock valuations, it gets tougher when investors ignore some of the most important factors behind those valuations. In other words, on Wall Street there is cheap and then there is you-are-stupid-if-you-buy-this cheap.

I become more convinced daily that the latter category fits the exact description of beleaguered tech giant Research in Motion (RIMM). The list of decisions earning my contempt is pretty lengthy, but each of those decisions came with reminders from its still loyal base of investors that the company is only one good idea away from being a turnaround story, one reminiscent of Apple (AAPL). While the comparison could be fair, and as much as I want to believe in the possibility, it is hard to envision a RIM turnaround absent new ownership -- and, more importantly, absent the type of visionary it requires to take the types of risks necessary to discover markets beyond that in which it has failed.

Research in Motion's price per share has dwindled to $10 today from $140 three years ago.

The best thing for RIM at this point is to accept its status and concede the foregone conclusion of the past three years: The smartphone game is over, to the extent that in addition to being passed by Apple and Google (GOOG), Research in Motion will soon have to battle Nokia (NOK) and its partnership with Microsoft (MSFT) for the No. 3 position. If this were football, Apple would be kneeling on the ball with each snap and running out the clock. On Thursday the stock reached another 52-week low of $10.57 -- on the heels of my suggesting several weeks ago it was a great short at under $10.

As noted, understanding why the stock has gotten cheap -- particularly with a paltry price-to-earnings ratio of 4 -- is paramount in appraising real value. RIM has not shown it has the ability to compete effectively in its market, nor does it have the Applelike forward-looking ability to think of what consumers are going to want before they realize they want it. It hasn't been able to make a successful transition from one product to another either by strategic acquisitions or innovation, unlike names such as Apple and Oracle (ORCL). But its advocates sees it another way.

RIM investors refuse to accept the reality increasingly realized by more astute investors: The stock has become "stupid cheap" because the company is following in the footsteps of former giants such as Novell, Lotus, Netscape and, more recently, Palm -- all simply incapable of adapting to changing markets. Instead, in an odd way, they choose to play victim and blame the "unsophisticated market" too blind to see that RIM has the superior product. Remarkably, they have fallen in love with their own captors (or in this case, the cheap stock). They are unable to answer how a stock can go from $140 three years ago to $10 today without blaming the company's management. The emotional connection is out of control.

Bottom line
The direction of the company should be a major concern to every shareholder, even those with glass-half-full outlooks. If the company is not a target of an M&A acquisition at some point this year it will be a complete surprise. High on my list of potential suitors are Cisco (CSCO) and Dell (DELL) (with the obligatory mention of outside shot Microsoft). From an investment standpoint, there is a saying on Wall Street that reminds investors that "one should never add to a losing position." But it also takes a special set of skills to distinguish between price and value. Touching RIM at this point requires not only the use of surgical gloves, but appreciating the old adage that says "stupid is as stupid does."

At the time of publication, the author was long CSCO, AAPL, ORCL and held no positions in any of the stocks mentioned, although positions may change at any time.