Trends are trends… Facebook & Research in Motion (RIMM)

By: ispeculatornew
Date posted: 04.18.2011 (5:00 am) | Write a Comment  (0 Comments)

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You know, it usually seems way too simple to follow trends until they are broken. What do I mean? Some will buy stocks that rise and sell those that decline. The theory of course is that companies that have momentum will keep it up while those are heading to the ground will keep it up. In the tech world, it’s difficult to find two more extreme examples than Facebook and Research in Motion (RIMM). Last year, I had written about “catching a falling knife” as I discussed the buying of both RIMM and BP which had just suffered major losses following the oil spill.

Why buy beaten down stocks?

Many investors jump into stocks that seem to be free falling. Why? Because they expect the drop to be an overreaction and expect to end up buying at a lesser price than the actual value. It is done for long term drops such as BP and RIMM but also in very quick drops. For example, after the recent earthquakes, many Japanese stocks crashed very quickly within seconds. Some traders would then jump abord to buy and in this case as in many others, it worked out very well. But in can be risky in many others.. buying Lehman or Bear Sterns in their declines turned out be major disasters.

Trading the trend?

The opposite strategy of course is to trade on the trend. One of the most common ways to perform this kind of trading is by using the moving average. A stock that is above its MA is rising while one that is below is declining. The more extreme the variation, the more severe the movement. Often these traders will end up hoping to ride the trend until the very end and it can take some time…Why? Because there are often some very good examples why these trends occur…often explained by the underlying fundamentals.

Case in point: Long Facebook & Short Research in Motion (RIMM)

I know, I know, Facebook is not a public company so buying the shares is not easy. But I’ve said over and over how valuable I think those are. The company’s valuation has been rising faster than any other in the world. On the opposite side, Research in Motion (RIMM), the company that used to dominate smartphones is falling behind quickly and its stock has been reflecting that.Is it a coincidence?

Most recent examples

I think that most weeks offer several examples of why these trends have been going on for so long and this week has been yet another example.

Facebook: Brilliant move by the company to enter China, the most tricky and most difficult market to enter given the government restrictions that have forced many companies including Google out of the country. I have my theories on why this is happening (it’s not just about censorship) that I talked about last week but I think that teaming up with Baidu (BIDU) is brilliant because it will help Facebook become a solid player by aligning with the top Chinese internet company. As well, it makes it much more difficult for Facebook to be kicked out of the country as that would mean the country would be slapping Baidu at the same time…It’s a simple but smart move to enter what will soon be the most important internet market.

Research in Motion (RIMM): Two more reasons to dislike RIMM as this week one co-CEO stopped an interview midway in with the BBC because he did not like the questions. That’s not terrible though. But coming out with the Playbook over a year later with not much to show off in terms of capabilities, apps, pricing, etc. It’s honestly kind of pathetic . The hope of course is for the product to get better over time, to add apps (it will have about 3,000 at launch but this summer will gain access to most of those of Android stores).

In both cases, playing the trend has been a winning strategy for over a year now and I personally do not expect things to change in the near future. I would love to hear your thoughts on this..! Do you invest following trends?

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