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Research-in-Motion Ltd. (NASDAQ: RIMM) is set to report earnings after the closing bell on Thursday afternoon.  The troubled smartphone maker has seen its estimates tempered consistently and the only real hope we have seen is that the company could report earnings that are not bad enough to keep major pressure on its shares after an 80% or so drop.  If that happens, there is a huge short interest here to consider that could create a short-covering rally.

Thomson Reuters has a consensus price target of $15.85 versus its latest close of $13.67.  Earnings estimates are $0.81 EPS and $4.54 billion in sales.  With a new leadership structure, we are unsure about how the company will offer a tone in its guidance.  The quarter ahead is expected to currently post earnings of $0.66 EPS on $4.26 billion in revenues.  We recently had a trader pose a question while coming up with the “playing RIM for under $10” strategy and that was simply “What happens if or when RIM starts to actually post losses rather than positive earnings?”

With the takeaway from Apple Inc. (NASDAQ: AAPL) for its massive iPhone growth and its iPad dominance, RIM investors have to hate Apple at the moment.  The same may be true for Google Inc. (NASDAQ: GOOG) with its strong Android platform sales and with news of it getting into the tablet business later this year.  We recently have seen two analyst calls showing a tempering of estimates here:

• Canaccord Genuity’s T. Michael Walkley maintained his HOLD rating, with a $15 price target talking about weak sell-through trends for BlackBerry 7 smartphones despite increased marketing efforts.
• Shaw Wu of Stern Agee reiterated his Neutral rating and talked about much lowered expectations with the Street cutting estimates aggressively over the past few weeks.  Wu did note, “we believe RIMM may report a decent quarter and guide less worse than expected.”  As such, the firm said it would not be surprised to see a near-term relief rally but with many caveats.
• ThinkEquity also just discussed its HOLD rating on RIM and called its $12 price target more of a salvage value.

Options traders appear to be braced for a move more than $1.30 in either direction if we use the monthly April options rather than the weekly options.  Why this matters is because if that level is reached on the downside it implies retesting and potentially breaking 52-week and multi-year lows.  At $13.65, the 52-week trading range is $12.45 to $57.32.

The chart might not seem to matter so much on the surface since it looks so weak on a long-term basis.  After taking a closer look, it is worth noting that recent support has been at $13.00 with the exception of a December drop when shares went lower.  Back to the $1.30 or so that options traders are pricing in, the 50-day moving average is up at $14.86 and implies that natural resistance might come into play if the report manages to be less bad than expected.

As a reminder, RIMM has one massive short interest that has actually continued to grow.  The short interest as of March 15 settlement date was 60.3 million shares versus 59.2 million shares short on February 29 and versus 55.9 million shares short on February 15.  In fact, RIM’s short interest is the largest we have seen.

With declining earnings and with put options having a very large open interest in the April put options, we consider RIM a value trap rather than a value stock.

Stay tuned.  This could be one of the make or break quarters for a stock that is already bruised and battered.  Options traders are signaling that RIM shares could move up or down by about 10%.  The average daily volume is just over 19 million shares and we could easily expect to see 75 million or more shares trade between the after-hours session today and tomorrow’s close.

JON C. OGG