RIMM Breakdown: Diary of a Decline

Remember last year about this time when Research In Motion (RIMM) once again disappointed the Street and the stock took a big fall? The once dominant mobile device maker has slowly seen its market share erode, especially as its strongest customers in the business class swap their BlackBerrys for iPhones. Last night's disappointing report from the company was not a surprise to those who were paying attention.

The interesting thing about a company and stock like this is how much investors want to believe in the turnaround for such a former gorilla of tech. But despite all the stories we tell ourselves about how great the future could be, what with PlayBook tablets and all, there is one way to ground our expectations and RIMM's story can serve as an instructional lesson for us all.

That "one way" is to use the best available research on future financial projections -- from sales and earnings growth to new product development and new market penetration. And that best available data comes from the equity analysts who follow the given company.

A Trend of Diminishing Expectations

The financial projections and resulting earnings estimates from analysts are by no means foolproof. They are simply the "best available" data points to use because, in aggregate, they form a reasonably predictive picture of the future that large institutional investors will bank on with real money.

After all, if a half-dozen or more analysts working full-time to research a company's business can't give us some degree of reliable decision and prediction points, can we do any better on our own guessing and telling stories about earnings growth and intense gadget competition based on what we observe on the street?

Anecdotal research has its place, ala Peter Lynch investing wisdom. But analyst earnings estimates can give us a no-nonsense, quantitative benchmark to temper our feelings.

The trend of RIMM earnings estimates for the past two years has been pretty much sideways, with occasional dips and a surge of growth expectations late last year. It seems the analysts too wanted to believe in 2010. But as the Zacks Price & Consensus Chart shows below, hope was slowly fading from institutional portfolios and the last price surge to $70 in the first quarter of this year began to retreat before the analysts finally threw in the towel in the second quarter.

You can see full-year earnings estimates for 2011 (blue line) were approaching $7 per share, but then took a quick dive after their quarterly report in March. 2012 consensus estimates of over $7 (red line) also took a big hit at the same time. But the stock was already reacting badly right before analysts lowered their estimates, and things only heated up as the downward revisions rolled in.

RIMM subsequently notched two 50-million share sell-off days where shares gapped lower, once in late March and again in late April on a slide into the $40's. That selling momentum may reach a capitulation bottom soon below $30, but I'm not betting on it just yet until the earnings picture is clearer -- and, preferably, not trending lower. After all, RIM isn't just gonna go away and die... is it?

Love the Story, Vet it With Hard Data

It's not easy checking your biases at the mouse pad when you log into your brokerage account. But as behavioral finance research has proven, becoming a rational investor who is relatively immune to self-sabotage can make the difference between a portfolio that greatly underperforms the market (very common for the self-directed investor) and one that outperforms. We're talking about hundreds of thousands of dollars in difference for the average retirement holdings.

A story I have loved for two years is that of Apple ( AAPL - Analyst Report ) . It's hard not to be caught up in their tale since they manufacture must-have gadget magic and productivity tools. I own a bunch of Apple stuff and I see it everywhere I go.

And there's a fair argument to be made for the possibility that as consumers like me progress up the product chain, we'll be buying Apple desktops soon enough. That could vault their single-digit desktop market share into the double digits.

You can imagine what that will do to Apple earnings. But sticking with today's theme of qualifying the stock stories we love with quantifying evidence, I will keep my eye on the trends in analyst earnings estimates. Right now, 2012 estimates are trending nicely "up and to the right" toward EPS of $30. If and when that line begins to flatten out, I may go neutral on the shares. Until then, I continue to buy the dips as I did for the last two years.

Kevin Cook is a Senior Stock Strategist for Zacks.com