Chasing Value: Nokia calling
Don't hang up on the beaten-down phone maker just yet.
By Sheldon Liber
Nokia (NOK) stock has been down recently, and there are many who think it will stay down. That is creating opportunity for the few investors who have the experience and foresight to take advantage.
For more than a decade, Nokia was a huge business success story coming out of Finland. From 1998 until this year, it was the No. 1 manufacturer of mobile phones. It recently lost this spot to Samsung.
Although smartphones by Apple (AAPL), Samsung (SNNLF) and others have iced down this northern light, Nokia has faced challenges before. The company was slow to adopt flip phones and lost U.S. market share when Motorola, now Motorola Mobility acquired by Google (GOOG), introduced the original RAZR design. Now they are playing catch-up again, and the stakes may be all or nothing this time.
That has led Nokia to change top management, which in turn made some bold moves, selling assets to improve the balance sheet and dropping its proprietary operating system in favor of partnering with Microsoft (MSFT) to introduce new Windows 8 smartphones. They have an early lead in this area and AT&T (T) is said it will be selling Nokia's Lumia 920. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
Where does all this leave investors? The stock has plummeted from a one-time high of $40 to a recent 12-month low of $1.63. That is a dot.com bubble type collapse, although not induced by one. It closed Thursday at $2.64, higher but still impoverished.
We could discuss many issues related to financial metrics, phone design and competition, but for today I will leave you with only one question: Will Nokia survive? If you believe it will, then this may mark a rare opportunity to multiply an investment many times over. I have no illusion that the party days of a $40 price tag are gone and not to return in the foreseeable future. However, the 12-month high is $7.38 and that it could see again.
What to do? I have been betting Nokia's fortunes will improve. I have been selling put options (naked puts because I do not own the stock) with time frames from now through January 2014 leaps. My favorite deal is the January 2014 $2.50 strike last traded for an $0.82 premium. Subtracting this premium from the $2.50 strike price gives you a break-even of $1.68, near its bottom and far below its current price.
The return on investment is 39% -- (0.82/1.68) x (52/65) -- if the stock is higher than $2.50. That means if the stock goes nowhere for 16 months, then the option contract expires and you win. Furthermore, you get the premium today.
But what if the stock drops? What is the downside? It would have to reach new lows for that to happen. Still, in today's low-interest-rate environment, even a fraction of 39% would be great. If Nokia, with about $5 billion in cash and new products rapidly hitting the market, supported by partnerships with Microsoft and AT&T does not grow the company then it would be game over. I do not believe that is very likely.
Sheldon D. Liber is the CEO/CIO of Chasing Value Asset Management, Inc., and General Partner of the Chasing Value Fund. You can follow him on Twitter @chasingvalue.
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Excitement is growing about the company's new iPhone, expected this fall.
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