Update: Smart Phone Makers Ripe for Profit Taking

Earlier this year I wrote separate pieces highlighting both Research in Motion (RIMM), maker of the Blackberry and smart phone staple, and Palm (PALM), the turnaround story trying to get their name back into the mix. In the four months or so since then both stocks have soared, nearly doubling in each case (PALM from $6 to $11 and RIMM from $44 to $78). Not surprisingly, these are instances when taking profits makes sense.

The competitive landscape for Research in Motion really hasn’t changed since February. The stock move is based on two things; the overall market advance, as well as renewed optimism that Blackberries remain popular devices and profit margins will hold up nicely even in this heightened period of competition and economic challenges. RIMM has seen its P/E ratio on 2009 earnings estimates jump from a very meager 13 times to a more reasonable 20 times, which seems more appropriate to me.

In Palm’s case, the stock has moved in anticipation of their new device, the Pre, set to debut June 6th. While the prospects remain bright for both the Pre and subsequent devices Palm is sure to launch in coming quarters, we often see a sell off in the stocks of tech companies heading into or right after major product releases (so called “buy the rumor, sell the news”). In order for Palm shares to make new highs above the recent peak of $14 $12 per share, the Pre launch really must go perfectly. However, as is the case with many new product launches, expectations are high and there can be hiccups along the way. Therefore, there will be opportunities for investors with big gains to take profits and put selling pressure on the stock.

In both of these cases, investors who have sizable gains and still believe in either or both of these companies longer term can have their cake and eat it too by taking some chips off the table and keeping a smaller position to profit from if their instincts are right about the future.

Full Disclosure: Peridot Capital was long shares of Palm at the time of writing, although the position has become smaller in recent weeks, and positions may change at any time