BlackBerry’s stock was hammered yesterday due to a report by research firm Detwiler Fenton, who claimed that Z10 devices were being returned in unusually high numbers. From Wednesday’s closing price to the lows on Thursday, BlackBerry lost over $1.25 per share. It closed at $13.55, down from $14.69 the day before, for a loss of nearly 8%.
The claim seemed absurd, essentially saying that in some cases returns are exceeding sales. I challenged this claim on Twitter, and I think anyone with half a brain who stopped to think about the claim realized it was neither logical nor worth repeating. But the media is in the business of getting website traffic, and when a story like this hits the wires it spreads virally.
Despite BlackBerry and Verizon publishing statements early in the day, geared to neutralize the negative headlines, the topic still dominated BlackBerry-related discussion yesterday.
It’s one thing for a research firm to do actual quality research, publish the results, and benefit from the credibility of being accurate and first on an important topic. It’s quite another thing to publish horribly wrong information without disclosing methods, or without performing a sanity check. This is why so many people will immediately suggest that Detwiler is being paid by unscrupulous short sellers (hedge funds) to feed out a negative story and capitalize on the inevitable stock price drop.
Let’s have a look at Detwiler, shall we? They are small. The equity research department is made up of 6 analysts. That’s a tiny team. They focus on supply chain “checks” and other sorts of channel-gathering information in order to supply this information to institutional buyers (and sellers) of stock. They get paid by delivering information (packaged as research) to these institutional clients. It would be too complicated to explain the mechanism for how they get paid, but it’s just a glorified version of clients writing a cheque for access to this “research”.
On BlackBerry, Detwiler is the same shop that said the Q10 would be delayed until June. They also claimed that the recent 1 million unit order was from Brightstar, on behalf of Verizon, further suggesting that this move by Verizon takes inventory risk away from the large US carrier. Naturally, this makes absolutely no sense and it’s immediately evident to anyone who understands this business that much of Detwiler’s “research” on BlackBerry has been horribly wrong and lacking logic.
So what’s their real agenda? I can’t say I would blame you if you drew a conclusion that these guys are purposefully publishing inaccurate research in order to support their major clients, who have shorted stock. I’m not going to say it’s true, because I don’t have any evidence to back it up. But this possible explanation is sitting right there staring us in the face, and I can’t blame the people who think it’s worth exploring.
This brings us to today’s press release by BlackBerry. They’re rightfully upset by inaccurate research being published, harming their stock price, and possibly harming the public’s perception of the Z10 and the upcoming Q10.
Remember I worked as an equity analyst (sell side) for 11 years. I’ve written negative reports, and plenty of them. I’ve seen management teams get upset at me for these reports, and I’ve seen them get upset at other analysts too.
When a legitimate critical report is published, I’ve often seen sour grapes expressed by management by way of phone call to the analyst’s boss (the director of research). The CEO or CFO calls the analyst’s boss and starts bitching about the report, often in an attempt to get the analyst fired.
Smart bosses know better. When a CEO or CFO calls to complain like this it’s usually a case of “where there is smoke there is fire”.
Smart management also knows better. And BlackBerry fits into THIS camp. Instead of bitching to the firm, they went straight to the SEC and Ontario Securities Commission. It isn’t their job to fight this battle. It’s their job to report what they may believe to be manipulative research.
BlackBerry handled the situation beautifully. They need to send a message. That message is simple. I’ll paraphrase it as, “If you have legitimate research, go ahead and publish it. But if you dare manufacture false information to manipulate the stock, we’re going to put the proper authorities on your ass.”
Whenever I was working on a negative story and uncovered something I thought might be highly controversial, I would give a heads up phone call to the company in question. It would not be legal to tell the company that I was considering changing my recommendation. But a phone call to sanity check my information, not discussing anything about a possible recommendation change, would always be the right thing to do. It’s a simple phone call. “Hey, I discovered this [really bad news] and before I publish anything on it, I want to run it by you to make sure you can’t show me where I may be going wrong.”
When somebody publishes incredibly negative information on a stock, like Detwiler did, and refuses to discuss their research with the company either ahead of time or after the fact, and that “research” doesn’t even pass the smell test and turns out to be totally wrong, it definitely raises eyebrows.
Good on BlackBerry for going after stuff like this. Nice to see their new Chief Legal Officer, Steve Zipperstein, taking action.
