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Tuesday, December 4, 2012 - 17:00
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Tuesday, December 4, 2012 - 17:00
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Tuesday, December 4, 2012 - 17:00

A Bet on This Underdog Could Land You 25%-Plus Returns

Tuesday, December 4, 2012 - 5:00pm

You may have noticed a pattern with my trades during the past few weeks: I've been picking "underdog" stocks with great success. My latest pick, Facebook (Nasdaq: FB), has gained more than 10% in a week. And my previous pick, Tesla Motors (Nasdaq: TSLA), is up more than 8% in two weeks.

This week, I'm bullish on the underdog stock of the smartphone world: Research In Motion (Nasdaq: RIMM). As a Canuck, I've always had a soft spot for the Canadian wireless device maker. But what I really like about the stock is its current bullish technical outlook.

On the heels of recent analyst upgrades -- from the National Bank, CIBC World Markets and Jefferies -- RIMM appears to be sparking renewed trader enthusiasm. The upgrades are based on bets that RIMM's new mobile device, the Blackberry 10 (BB10) -- likely to be released in late January -- will be so good it will steal users away from Apple (Nasdaq: AAPL), bringing them back to their Blackberry roots.

Conservative estimates are that BB10 sales will be in the range of 8 million to 9 million units in 2013; however, some industry experts project sales could easily be double that, at around 19 million to 20 million units.

Currently, there are about 80 million Blackberry users worldwide. The new BB10 device could potentially increase RIMM's customer base by 10% to 25%. A growing customer base should be no problem for RIMM to handle. Currently, Blackberries run on 565 wireless networks in more than 175 countries. In contrast, Apple's iPhone runs only on 227 carriers worldwide.

From a technical perspective, the stock currently looks to be an ideal buy. Shares are still cheap, and appear to be heading due north.

However, it should be acknowledged the stock has taken a long, hard fall since its 2011 glory days, when it traded at a high of $70.54. In just under two years, shares have lost more than 90% of their value, slipping to an all-time low of $6.22, before finding support around this level.

Bouncing off support in October 2012, the stock has been slowly making its way back up. In late October, shares completed a significant technical milestone: They bullishly broke through the major downtrend line. The stock has been ticking up, on a minor uptrend, ever since.

On recent analyst upgrades, RIMM just blasted through resistance near $9.50. In doing so, the stock bullishly completed a U-shaped technical formation, known as a basing pattern. According to the measuring principle for a basing pattern -- calculated by adding the height of the pattern to the breakout level -- shares could potentially reach a new price target of $12.92 ($9.57-$6.22 = $3.35; $3.35+$9.57 = $12.92. At current, this target represents 10% potential gains. However, with bullish momentum, it's plausible the stock won't stop until around $14.67, an area of more substantial overhead resistance.

Although the company's fundamental outlook is not overly strong, the new BB10 may help push revenue and earnings up over the longer-term.

For the fiscal 2013 year, analysts project revenue will drop 40% to $11.1 billion, from $18.5 billion in 2012. But, by fiscal year 2014, analysts expect strong BB10 sales will send revenue back into the positive, with RIMM clocking a 1% gain on $11.2 billion in sales.

The earnings outlook is similar. Analysts project fiscal year 2013 earnings will drop to -$1.26, per share from +$4.20 last year. By 2014, the gap is expected to narrow with earnings trending closer to the positive at -$0.56. However, it should be noted, during the past 90 days, earnings estimates have been upwardly revised. Three months ago, analysts estimated 2013 earnings would fall to -$1.52, while 2014 earnings would be a dismal -$0.63. Today, the estimates are +16.5% and +13% higher, respectively.

Risks to consider: The stock has moved quickly during the past week. But the real growth ahead may be slow and steady, taking place over approximately the next year. During this time, the company has a daunting task ahead of it. It must launch a new device that not only wins over existing customers, but is so it good it also lures in new users. The BB10 may be a make-or-break-it product for RIMM. Judging by current analyst and trader sentiment, so far, it looks like the company will "make it."

Action to Take --> Buy RIMM at the market price. Set stop-loss at $9.56, slightly below support. Set initial price target at $14.67 for a potential 26% gain by late 2013.

This article originally appeared on
A Bet on This Underdog Could Land You 25%-Plus Returns

Deborah O'Malley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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