Nokia: Buy the Rumor, Sell the News
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of mobile device maker Nokia (NYSE: NOK) are down over 10% today in the aftermath of the company’s release of its new Microsoft (NASDAQ: MSFT) Windows Phone 8 models, the Lumia 920 and the Lumia 820. Theories and speculation already abound as to the reasons for the selloff, but there are two that likely make the most sense and are actionable from a trading perspective.
The most obvious explanation -- that investors were unimpressed with the new devices -- is certainly an option, but this may be an over-simplification. Rather, it seems more likely that the plunge is driven by the lack of guidance given by Nokia on the pricing and timing of the devices’ sales and by a common stock market occurrence: “buy the rumor, sell the news.”
The new Lumia 920, meant to be Nokia’s new flagship device, builds on the “active tile” concept and introduces some new features. The phone will include active stabilization software for its upgraded camera through what is being called “floating lens technology.” Another new feature is the “Nokia City Lens,” which allows users to simply point the device at a building and receive information about it – this includes restaurant info and points of interest. While the new features add to the phone’s appeal, they do not appear to be industry-changing; it is likely too early in the story to make a thorough assessment of the Lumia’s full appeal.
The Timing Issue
The lack of guidance as to when the two new Lumias will be available, and at what price, is likely one of the biggest negative catalysts on Nokia’s stock today. A big hope for Nokia was that the Lumia would enjoy a few weeks of exclusivity before Apple (NASDAQ: AAPL) rolled out the iPhone 5. Without any guidance as to when the phone will actually be available for sale, that apparent advantage may be forfeited.
The Microsoft/ Nokia offering already was expected to be subject to a potential lag as consumers waited to see what the iPhone 5 offered. If the Lumia 920 does not gain a first-mover advantage, the small edge it might have possessed will be lost.
Compounding the issue on timing is the fact that Google (GOOG) is launching a new Motorola Razr today through its Motorola Mobility division. The new Motorola phone will contain the same Qualcomm (NASDAQ: QCOM) Snapdragon S4 chip that is in the Lumia. While the news is likely very positive for Qualcomm, it cuts further into any exclusivity the Windows Phone might have enjoyed.
The News Versus the Rumor
There is a common phenomenon in the stock market that tends to drive stocks increasingly higher into a major announcement and then much lower when the announcement is finally made. This is largely attributed to traders taking profits once the anticipation of future news is removed. In certain cases, the move lower may be deserved – those cases where the news did not live up to the hype – but that is not always the case. This phenomenon has become so common that it is a bit of a self-fulfilling prophecy, but it is therein that an opportunity may be created.
Trading the Fall
The significant fall in Nokia’s shares underlines how precarious the company’s overall position is and how much is riding on the success of this new line of products. Trading around $2.50 per share, however, the dividend yield on the stock is above 6%. With the combination of solid income and the potential that the company will turn around, owning shares as perpetual options is an attractive speculative play.
The trade is sitting in a high risk/high reward position that is worth making a small allocation to. There are enough strengths for Nokia that buying at depressed levels has merit.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Apple 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.