Shorting Smartphones

Ahead of dire predictions for this Thursday’s second quarter earnings from Research in Motion (TSE:RIM; NASDAQ:RIMM), we use securities lending flow to asses both long and short investor sentiment towards the Blackberry manufacturer. We contrast this against the broader global Smartphone sector to assess how investors have positioned themselves following the market turbulence in August. Additional companies covered include Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), HTC (TPE:2498), Nokia (HEL:NOK1V) and Samsung Electronics Co (SEO:5930).

While RIM’s share price might have staged a partial recovery since the beginning of August, MarketWatch, reports that Wall Street analysts expect a 40% fall in earnings as Blackberry sales stall and the company’s market cap has halved since the first half of the year. A muted response to the launch of its first tablet, the Blackberry Playbook, increased competition from the Apple iPhone and other more cost effective competitors in this lucrative international market has spurred short sellers to raise their positions in the Canadian listing. Short interest stands at a two-year high of 7% of the total shares - up 40% since the beginning of August. Yet during this time, institutional investors who lend have added 8% to their holdings and they now own 84 million shares or 16% of the company.

The US listing tells a different story, which could reflect arbitrage partially driven by the relative strength of Canadian Dollars versus US Dollars. Short interest peaked at the end of August at 2.6% of the total shares, before falling to 1.5%. Institutional investors who lend have also increased their holdings since the beginning of August by 16% to 28 million shares or 45% of the company. However, this only represents a slight bounce from a 2 year low.

While the President of HTC America has hit the headlines by claiming Apple is “not that cool anymore,”and that the iPhone is for “old people” (like this writer!) it seems investors don’t agree. The shares of Taiwanese manufacturer, HTC, have fallen by a third since the peak seen at the beginning of June, andsince then, short interest has risen steadily to reach 2% of the total shares, a level not seen for almost a year. This is high for a Taiwanese name given how many fewer shares are available to borrow.

The success of Amazon’s Kindle has created much hype surrounding the company’s foray into the tablet market, with many commentators believing that Amazon is the company best placed to offer a reliable, cheaper alternative to Apple’s iPad. While the share price has recovered lost ground following the August turmoil, short interest has more than trebled since the beginning of August to reach 1.8% of total shares. Yet this is still well below the average across the S&P 500, which has risen to above 3%.

Analysts at IDC revealed that Smartphones now dominate the Western European phone market, pushing Nokia into the number two slot having been usurped by Apple in Smartphones and Samsung Electronics’ overall cellphone sales. Short interest in Nokia has remained consistent over the summer at 5% of the total shares, while the share price tumbled to annual lows at the end of August, before recovering slightly.

The share price of Samsung Electronics has trebled since the beginning of 2010 and the Wall Street Journal noted that its fast growing Smartphone business is poised to overtake Apple in terms of unit sales this quarter. The company has introduced several new Smartphones and tablets based on Google’s Andoid operating system and is reported to be confident of finding ways to navigate patent injunctions lodged by Apple in some European markets. Short interest is very low but has doubled in the last week to 0.25% of the total shares.
To recap, short sellers are not expecting RIM to announce that they are out of the woods yet when they report their results on Thursday.