RIMM – Earnings good, but good enough?

Shares of the Research in Motion (RIMM) fell about 4% in after-hours trading today upon the release of the company’s latest earnings report. Although RIMM is still growing nicely, the latest results could renew the worries in regards to the increased competition from the likes of Apple’s iPhone and devices based on Google’s Android software. The company also announced it will buy back up to 31 million shares over the next 12 months.

In the three months ending May 29, RIMM had shipped 11.2 million BlackBerrys and gained 4.9 million new subscribers. Analysts were expecting shipments closer to 11.5 million and at least 5 million new subscribers. The company also stated that profit rose to $768.9 million, or $1.38 a share, from $643.0 million, or $1.12 a share, in the year-ago period. Revenue climbed 24% to $4.24 billion in the three months ending May 29. Analysts had expected RIMM to earn $1.35 a share on revenue of $4.35 billion. In their conference call, executives said revenue was lighter than expected because RIMM had sold more of their lower-priced BlackBerrys. In the second quarter RIMM predicts earnings of $1.33 to $1.40 a share and revenue coming in between $4.4 billion to $4.6 billion. Wall Street was forecasting a smaller profit of $1.32 a share on revenue of $4.52 billion.

Although the earnings were good, they seemed to have missed Wall Street’s expectations. What does this mean for the stock? What is the trade? Let’s review the chart of RIMM, which I have shown below.

RIMM – 1YR

First, notice the up trending support line that I have denoted in blue on the chart. You can see that in the beginning of May RIMM broke that support. So, is it possible that investors had already been anticipating a slow down in earnings growth for RIMM? Remember, the markets do tend to be forward looking. Based on the recent 3 month downtrend in RIMM’s stock, and the break of the up trending support in May, it appears that today’s disappointing earnings release was somewhat expected. Also, what if you had been following RIMM’s stock back in the beginning of May? Entering a short position upon the break of the up trending support level would have been a very successful trade.

Flash forward to the stock’s current position. With today’s release, RIMM will most likely be on the move. I have highlighted two key areas to watch in the near term. A key level of support will be the area at $55, which I have shown in red. A break below this level would probably signal an increase in selling pressure and lower prices ahead. However, if the stock were to instead break higher through the $63 resistance level (green), I would expect higher prices in the future.

The Tale of the Tape: RIMM’s earnings release will most likely set the stock moving in a new direction out of its current range between $55 and $63. Those will be the two key price levels to pay attention to. A break above $63 would be an ideal time to enter a long position with a stop below the $63 level. On the other hand, what if the stock were to instead break below its key $55 support?  Instead, entering a short position with a stop above the $55 level would provide an excellent trading opportunity.

The markets are entering another earnings season. It will be important as a trader to pay attention to key breakout points for your stocks. Stocks will most likely break into new ranges upon the release of their company’s earning report. Identifying the most opportune times to enter trades, such as I have outlined above with RIMM, should provide you with much higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT