How I'm Protecting My BlackBerry Gains Ahead of Earnings

Readers will recall that, after Blackberry BB reported the firm's fiscal fourth quarter earnings back in early April, I informed subscribers that I would be initiating a long position in the name. 

The firm reported an adjusted EPS of $0.03 on revenue of $141.7 million. Those top- and adjusted bottom-line numbers both beat Wall Street, despite the fact that the revenue print reflected an 18.1% year-over-year contraction. All three of the firm's divisions (Secure Communications and QNX — formerly known as IoT and Licensing), beat Wall Street as well as the firm's guidance for the quarter, not to mention the full year.

However, the guidance was disappointing. The firm projected fiscal first quarter revenue of $107 million to $115 million, which was below the consensus view at that time of $128 million. Adjusted EPS was seen at -$0.01 to break even when Wall Street had been looking for about $0.02. For the full year, that was just starting, BlackBerry forecast revenue of $504 million to $534 million, below consensus view of $548.3 million. Adjusted EPS was seen at $0.08 to $0.10, which was actually in line with Wall Street.

I had drawn up a chart for readers that had shown the stock with a head-and-shoulders pattern that had just about run its course, and I felt that even with the guidance, that the stock had become investable. I told readers that I would be initiating a long position after that article had been published and after that had first crack. Well, as of Friday's closing price of $4.23, my long position is up more than 37%, so I hope at least a few of you played along. (My net basis is $3.09.) About six weeks ago, in mid-May, I gave readers my target price of $4.75 as the stock had rallied and retaken its 50-day SMA.

Earnings

BlackBerry is set to report those fiscal first quarter earnings on Tuesday, after the closing bell. Wall Street is looking for an EPS (GAAP and adjusted) of $0.00 on revenue of roughly $112.2 million. These numbers are in line with the guidance that the firm had provided but would be down one penny per share and down 22% relative to the year-ago comparisons. Additionally, of the five sell-side analysts that I know who still cover this stock, all five have reduced their earnings estimates for BB since the start of the quarter.

Am I expecting upside surprises? I don't think so. Additionally, only about 1% of the entire float is currently held in short positions, thus greatly reducing any chance for some kind of post-earnings squeeze. I am thinking that I should protect my gains and take some profits ahead of those earnings, especially with all of the headline risk facing markets this week. (Note, I will be out this Wednesday and possibly for the remainder of the week.)

The Chart​

On this chart, ​readers will see the head-and-shoulders pattern that we had drawn out for you. That provoked a sell-off that bottomed 31% below pivot. Since then, the shares have developed a rising-wedge pattern, which is a pattern of bearish reversal. The run-up that we have benefitted from the retaking of the 200-day and 50-day SMAs that got whatever institutions were involved to probably increase long-side exposure.

The stock also took back its 21-day EMA, which in all likelihood, brought on the late push from the swing crowd. Readers will see that over the past week; the stock has flirted with breaking below the bottom trendline of that wedge pattern.

My New Plan

• Sell 50% of my long side exposure to BB ahead of Tuesday's afternoon's earnings
• Add those shares back in between the 50-day and 200-day SMAs. Currently that's between $3.50 and $3.70.
• If the shares break past the upper trendline? Add on momentum, even if paying up.
• If the shares fall below the 200-day SMA? Complete the profit-taking process.

At the time of publication, Guilfoyle was long BB equity.