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A quick review of the stocks contained in my $100,000 Real-Money Portfolio may give the impression that I’m a big fan of turnaround plays.
That’s actually not the case.
You get the idea…
Indeed, there are ample other sources for investors to find solid turnaround ideas. It’s simply not the over-arching theme of this portfolio. But I’m making an exception for my newest pick. It’s a once-great company that is struggling for relevance. Its management has had to make a series of very tough decisions, most of which have yet to truly pay off. And there is the real possibility that a hoped-for turnaround will simply never take root. Shares have roughly 25% downside if the business doesn’t turn around. But the upside is so significant, and early signals from the turnaround are sufficiently promising, that I need to add it to the portfolio now — before sentiment around the company changes.
I am talking about Nokia (NYSE: NOK), which was the world’s dominant maker of cell phones long before Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) entered the scene.
I have written about Nokia several times before, and for the sake of brevity in this article, I ask you to review what I have previously covered…
Back in November, I explained why short-sellers thought Nokia was headed for further trouble. In fact, the cumulative short position has risen further since then to a recent 216 million shares, or 6% of the float.
In this article, published six weeks ago, I started to see Nokia in a more bullish light, noting that a symbiotic relationship with Microsoft (Nasdaq: MSFT) was finally looking more promising.
Another tough month
Fast-forward to last week, where Nokia made a series of presentations at the Mobile World Congress in Barcelona. In a nutshell, Nokia discussed its new phone strategy in greater detail. The Lumia phones will target four slices of the market, from the low-end 610 model, to the high-end 900 model. (Nokia also revealed a new high-end phone using its legacy Symbian software with features such as a 41 mega-pixel camera, which analysts quickly deemed irrelevant.)
Going into the event, shares surged to $5.65 on an intra-day basis on February 21, the highest level in nearly a month. Investors were bracing for a game-changing announcement, and they didn’t get one. Shares are now back close to $5, not far from the $4.50 lows seen in mid-December.
Despite the gloomy stock price, an increasing number of technology journalists have come around to the view that Nokia’s Lumia phones are quite compelling and can hold their own against the iPhone and Android phones. Yet it’s two other factors that could provide a huge tailwind for Nokia.
The first is Microsoft’s software efforts. The software giant has been derided as an also-ran these days, living off the fat that Windows and Office software have generated. Yet Microsoft’s new software, which will have a consistent look and feel across PCs, tablets and (Nokia’s smartphones), is garnering rave reviews. (Please take a moment to read what The New York Times’ David Pogue recently wrote in this piece.)
He’s not alone. The Wall Street Journal’s Walt Mossberg and others think the Microsoft/Nokia platform is truly competitive and needs to be taken seriously. I’m especially intrigued to see how Nokia phones incorporate Microsoft’s Skype technology, which is still in beta testing. That could be a feature built right into the Microsoft operating system that compels consumers to switch from the Google/Apple duopoly.
In the hands of the carriers
To an extent, the success of the Lumia phones is beyond Nokia’s control. Instead, it’s up to the wireless service providers to get behind the offering. And they are, in a big way. Major European carriers are now pushing Lumia phones pretty hard in their stores and in their advertising. That’s also the case in a number of emerging markets, where the Nokia brand is still quite dominant. Early sales results are promising, but there’s a long way to go. Here in the United States, AT&T (NYSE: T) and T-Mobile are set to make a big push this spring and summer, and Verizon (NYSE: VZ) and Sprint (NYSE: S) may follow suit.
Why would these carriers bother? Because they have repeatedly stated that a world dominated by Apple and Google is bad for business. This duopoly gives Apple and Google far too much power over the ecosystem, and it’s now apparent that a third viable platform is in everyone’s interest (except for Apple and Google).
In each of the upcoming months, investors will be able to clearly track Nokia’s efforts to gain market share with the Lumia phones.
The Downside Protection –> Analysts expect Nokia to earn roughly $0.15 a share this year, with this figure moving up to the $0.30 to $0.35 range in 2013. The company currently has $10.9 billion in gross cash and $6.6 billion in net cash ($1.70 a share). Unless Nokia really struggles in 2012 to meet fairly modest expectations and ends up losing money, shares likely have downside support in the $4 area. Shares should find support from buyout speculation, if the turnaround fails to take shape.
Upside Triggers –> This is all about market share. Investors currently assume that the Lumia phones will make only a slight dent in Apple and Google’s hegemony. The next month or two will provide a series of data points regarding global carrier adoption, but it will likely be the summer or the fall before we can truly determine whether Nokia is on the path to a robust turnaround.
Action to Take –> I will buy 800 shares (or roughly $4,200 worth) of Nokia two trading days after you read this.
That’s a smaller-than-usual opening position for me, because I want to scale up my position only when more positive data points emerge. I also suggest investors put in a stop-loss order at $4.50, in the event that it becomes apparent that the Lumia phones aren’t gaining the necessary traction. Indeed, I would be a seller of this stock if a potential near-term turnaround gets pushed into becoming a long-term turnaround. Shares would simply be dead money at that point. Shares can be bought under $7, though that is a fluid target and could rise as the turnaround takes shape.
– David StermanSource: StreetAuthority
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