Fairfax doubles stake in RIM; a blind vote of confidence?

Toronto-based insurance and investment firm Fairfax has quietly become the BlackBerry maker's largest known shareholder of RIM stock, doubling the firm's investment since Fairfax's boss joined Research in Motion's board in January.

It was noted in a July 4 regulatory filing, only three days after RIM reported a massive operating loss. The Ontario-based smartphone maker reported a first quarter loss of $518 million on revenue of $2.8 billion, down 33 percent from $4.2 billion in the same quarter a year ago.

There's only so many times you can call "twist" before you go bust, but Fairfax seems to know something the rest of us don't, or it's punting down the wrong river.

Looking at who owns what: co-founders Jim Balsillie and Mike Lazaridis own 5.1 percent of the company, while California-based Primecap owns 5.42 percent. Fairfax had 5.12 percent -- a show of oneupmanship to the co-founders who stepped down earlier this year -- but now owns 9.99 percent. 

Fairfax's stake now represents close to 52 million shares, valued at around C$356 million as of Friday's close on the Toronto Stock Exchange.

Last year, Fairfax chief executive Prem Watsa upped its stake in RIM to 5 percent claiming the company can "bounce back" despite a global network outage that spanned four days and rebellious shareholders. A bold move for sure, at a time when RIM's shares dropped by 70 percent in the preceding 12 months. Now we're looking at more than 85 percent and the number continues to drop rapidly. 

He claims that because RIM has no long-term debt and still has a comparatively vast cash pile -- at the time, it was $2.1 billion, but now stands at $2.2 billion including equivalents as per its Q1 earnings -- which both of these things remain true.

But suffering a Q1 operating loss and expecting to fare worse later on this year with no new products, services, and a pushback on its dubbed-savior BlackBerry 10 operating system and smartphones, the bounce back looks unlikely. 

"As [well-known investor] John Templeton said: 'the best investments are made at the point of maximum pessimism'. We don’t know if RIM has reached that point, but we figure it’s pretty close," said Watsa in an interview, reports The Globe and Mail.

It's a vote of confidence using an analogy that's not so dissimilar to a addict or an alcoholic hitting rock bottom before they can make a recovery. That doesn't translate in business. 

And then Watsa let himself down:

"We believe in Thorsten Heins and we firmly support him and the entire BlackBerry team working tirelessly on the new BB10 platform," he added. "He’s got the experience and the passion for it, and he’s going to get it done. He is on a mission."

Seriously? What's up his sleeve? A takeover? Let's hope so, and soon. RIM continues to trade below $7 a share, up from a high of $15 earlier this year and an all-time high of $144 in 2008 at the height of its success -- just as the global financial crisis was about to hit.

Investing in a sinking ship is a risky move. Fairfax is bloating up on RIM stock in the hope the company will turn around. It could -- just could -- survive until BlackBerry 10 is rolled out in the first calendar quarter of 2013.

"When any company gets this cheap it could be taken over, but we believe this is a great Canadian company with a tremendous future." 

It's utter blind faith, rather than a hoped-for subversive push to break up the company and reap the rewards. Again, let's hope Watsa knows something we don't, because on the face of it, it looks like he's walking into a building on fire with wearing nothing more than a Hawaiian shirt on.