Analyst Silliness with Research in Motion

In recent days I have been paying special attention to shares of Blackberry maker Research in Motion (RIMM). The stock is one that had decent earnings this quarter but some investors wanted more, which prompted a pretty significant sell off in the stock. Despite the market having recently made new yearly highs, RIMM shares have dropped from the high 80’s to the mid 50’s. The stock is down several points today after the analyst who covers them for Citigroup downgraded it from “buy” to “sell.”

Skipping the “hold” rating completely is pretty rare on Wall Street, but what caught my eye even more was that the analyst lowered his price target on RIMM from $100 to $50. What happened to make the company worth 50% less overnight in his view? The upcoming release of Motorola’s Droid smart phone.

Call me skeptical of this bold call from Citigroup’s research department. The new Droid is going to be such a huge success that it will translate into a 50% haircut in the value of Research in Motion, which has a stronghold on the corporate smart phone market? Have we not seen dramatic hype surrounding new cell phones recently that only served to disappoint investors? The Palm Pre comes to mind immediately. While it may help Palm get back on the map, the Pre is certainly not looking like a genuine iPhone challenger like many were expecting. Should we believe that the Droid will similarly make a huge dent in RIMM’s Blackberry franchise?

I haven’t made the plunge into RIMM stock yet, but the odds are getting higher each day the stock continues to slide. At a current $55 quote RIMM trades at 11 times 2010 estimates ($4.85 per share), which seems reasonable even if that figure proves too high due to increased competition. Right now I might just be willing to make the bet that the Blackberry retains its lead in the corporate market for years to come. If so, the stock looks pretty cheap here.

How have this analyst’s past calls on the mobile sector turned out? Pretty lousy, which is par for the course on the sell side. Today the analyst upgraded Motorola to a buy and downgraded Palm and RIMM to sell.He initiated coverage for all three back in September 2007. Here is how the calls since then have turned out:

His track record on Palm has been decent; initiated at sell at $8, upgraded to hold at $6, and now back to sell at $11.

How about RIMM? Dismal. Recommended as a buy twice at $99 and $69, and now says you should sell in the mid 50’s.

Lastly, the Motorola record isn’t all that impressive either; hold at $18, buy at $12, hold at $6, buy today at $9.

All in all, the current negativity on Research in Motion looks overdone to me and as a result I am considering a contrarian investment. As always, please share your own thoughts if you care to join the discussion.

Full Disclosure: Peridot Capital had no position in RIMM at the time of writing, but is certainly taking a very close look at current prices.