The Contrarian Buy

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mr. Rogers

Jim Rogers is one of the best investors out there. In a 10 year period, his Quantum Fund had a 4,200% return during the 1970's! Compare that to the 47% gain in the S&P 500 over that same period. He retired at the age of 37 after starting out with only $600 10 year prior. He co-founded the Quantum Fund with George Soros, who is also a very well-known and well respected investor. How did Jim manage to make such amazing returns? He bought up stocks that had been heavily sold off that he saw value in, or short sold the "next big growth stocks" that were overvalued. Should you try out this tried and tested investing philosophy as well? 

What he thinks right now?

Right now Rogers is bullish on Japan as a whole because "at the moment, some stock markets, like the United States stock market is within striking distance of all-time highs. That is not a time to get very excited about things, but if and when some big stock markets around the world collapse, I would have to start getting more interested. Japan, for instance, is down nearly 80% from its all-time high. So I am looking around Japan. Certainly we have to look at Japan than at other places". Rogers sees Japan as a good play because of how sold off the markets are in Tokyo. Now look at Nokia Corp (NYSE: NOK) and how sold off it is. YTD the stock has fallen by 50%, and Nokia is well off its pre-crisis high of $40. Is there an emerging value play here? Nokia is currently trading at 0.71 times book value, which is much less than the industry average of 1.83. But, Nokia is burning through a lot of cash right now, so that is something you have to watch out for. If Nokia runs out of cash and is running at a loss, then bankruptcy or a sale is inevitable.

Nokia's Hail Marry

Nokia's last (?) hopes lay with Microsoft Corp (NASDAQ: MSFT) and its mobile platform, now Windows 7 but soon to be Windows 8. It is still too early to see if Microsoft will get some headway into the mobile business with its new and revamped operating system, but there are the bulls out there who believe that they can. This Wednesday Nokia and Microsoft unveiled the new Lumia 820 and 920 phone lines that will run on Windows 8. Investors weren't thrilled about this and sent Nokia shares tumbling 15.9%. Right now Nokia trades at 0.72 times book and at a discount to enterprise value as well. Some say that this isn't necessarily Nokia's last stand and it has room to try new things, but that remains to be seen as Nokia is burning through its cash hoard right now at a rapid pace.

The phones 

Investors weren't sold on the new phones due to the lack of information regarding its release, such as pricing and what carriers will have this device. But, reviews of the devices were pretty good. After watching cnet.com's first look review, they seemed quite happy with the device. They talked up the unique Microsoft look with the large squares instead of the standard small squares for the app icons. Idesigntimes.com says "the Nokia Lumia 920's defining design feature is its curved glass screen, a small difference that has a huge impact on the feel of holding the smartphone in your hand. Combine the curved screen with the Widows Phone 8 flashy home screen and you've got one very impressive first impression". Nokia's Lumia 920 has all the bells and whistles, such as an NFC chip, PureView Camera Stabilization, wireless charging and it will run on 4G networks.

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The pitfalls

The pitfalls for Nokia lie in its spending and profit (or lack thereof). It is burning through much more cash than it is taking in, losing $1.53 billion Euros ($1.93 billion) in the second quarter. It currently has $5.2 billion in cash, and lost about $882 million in 3 months from Q1 to Q2. It has enough cash to keep on going for some time, but eventually you need to turn a profit in order to stay afloat. Analysts think Nokia has a couple more years with its current cash hoard before things start to look really bad. Also Nokia has some debt, with a 57.95% debt to equity ratio as of last quarter. With a current market cap of $8.91 billion, over 58% of this stock is cash.

More Problems

"We were fine until the Phoenix-Durango was built"

All smartphone makers are afraid of Apple (NASDAQ: AAPL) runaway train, the iPhone 5, which is slated to be announced on September 12. Samsung likes to release its new phones is the spring because Apple has always released their new phones in the fall in order to not have to directly compete with the next new thing from Apple. Nokia has said they will release this phone in the fourth quarter in "select markets", which has investors worried because they don't know how many markets Nokia will be able to get into with their Lumia line and if Nokia releases these phones any later it could be "dead on arrival" according to Joe Magyer. Reports have come out now that Nokia will release these phones in November on both Verizon's and AT&T's networks. If Nokia doesn't release these phones on time Apple will continue to eat their lunch. The hype over the upcoming iPhone 5 launch is huge, especially after the special invitation was leaked to the public. Google (NASDAQ: GOOG) also is going to provide some intense competition for Nokia, as it just released its newest Motorola phone line. These new phones have a wall to wall screen, which could be very appealing to consumers as they get a bigger screen to work with and watch videos on. Google got a lot of very good buzz surrounding its new phones.

  

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Why I'm Bullish

I think that Nokia's stock price is already reflecting the Lumia sales being a flop or at the best just mild. But tech reviewers seem to be happy and excited over this new phone. Nokia's biggest blunder was not releasing enough information on pricing and who would be selling this device during the release, which made investors anxious and caused them to run away. Wall Street does not like uncertainty. I don't think the Lumia phones will be anything like Apple's iPhone 5 sales wise, but the smartphone market is growing rapidly and believe or not there are people out there who like Microsoft's operating system combined with a sleek new phone. The bar has been set very low for Nokia, so any good news becomes really good news and will send this stock higher, back over the $3 mark. This stock is both a turnaround play and a value play, as it has its hail marry all set up and is trading at a big discount to book. Also this company could potentially sell off its NSN joint venture, which would help it raise money if it had to keep on surviving. If this hail marry doesn't work though, then Nokia is going to be in some serious trouble.   

Final Thoughts

Nokia has a steep uphill climb to pull itself into profitability and out of the low single digits, but I think it can do it. I'm not saying I'm a 100% sure that Nokia will turn itself around, it could just as easily burn through all its cash and be nothing more than a shell that used to have over $5 billion dollars. Jim Rogers taught us that contrarian thinking can lead to amazing returns if you do your research and play your cards right, so in this instance I will have to agree with him. Bullish on Nokia's turnaround play.


callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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