Playing With The Dead
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are looking for the highest stock returns, financial theory encourages you to buy the riskiest securities. Nokia and RIM have been spiraling down in recent months, but a strong market reception in the case of the former and a series of product upgrades in the case of the latter have dramatically changed the trajectory last week. Will this bull run continue? Below, I present my opinion on the two mobile stocks.
A Hedging Strategy For Nokia (NYSE: NOK)
In the last 5 days ending November 26, Nokia appreciated by 21.3% but is still down 30.3% for the year to date. The mobile developer has done much better than expectations in recent quarters. Analysts expected the company to lose $0.12 per share in 3Q12; but, instead, it only lost 9 cents per share. The question then is whether this momentum will continue or whether it was an overreaction.
Nokia recently announced that it will release two new low cost phones, the Asha 205 and Asha 206. The products go for $62 unsubsidized and feature isolated keys for email, Internet, and Facebook. In a word of Android-based "Swype" technology and touch keys, I wouldn't hold your breath that sales will catalyze a growth story. The market seems to share my bearish stance, as evidenced by the 5.6% slide from the announcement. On the flip side, Windows 8 phones have sold out at domestic retailers, thus making one RBC Capital analyst up smartphone shipment forecasts. Lumia 920 is also penetrating in several international markets as diverse as Australia, Italy, China, and Germany. I believe this product will help revive Nokia and Microsoft's (NASDAQ: MSFT) perception as an innovating company. While Amazon may have introduced to the world the concept of apps, or big icons on touch screens, Microsoft and Nokia can do the same for the "Mango" layout.
By opening up a major stream of revenue, Nokia now has the working capital to invest in more R&D. Moreover, if Huawei and ZTE were shut out from the domestic telecom equipment market, as the House recommends due to the company's connection to the Chinese government, it would be a major tailwind for Nokia.
While I believe Nokia is a "buy" and undervalued, I recommend investing alongside Microsoft. If Nokia rises, so will Microsoft; and, if Microsoft appreciates separately, it will hedge against any risk from Nokia. Microsoft trades at only 8.5x forward earnings and generates a free cash flow yield of around 10%. Analysts are bullish on the stock with a price target of $38 from Stifel Nicolaus--more than a 30% premium to the prevailing price. With a 20% return on invested capital and 9.6% annual EPS growth forecast over the next 5 years, Microsoft is also creating value. It's only a matter of time before the market corrects itself.
The Research In Motion (NASDAQ: RIMM) Zombie
In the last 5 days ending November 26, Research in Motion appreciated by 30.2% but is still down 17.4% for the year to date. I find RIM a much riskier investment than Nokia. Several factors caused the price to lift. First, a National Bank Financial analyst increased the price target of RIM to $15 from $12--citing multiple explanations: (1) "positive sentiment building in the industry", (2) the early 2013 launch of new lines, and (3) favorable reaction from telecom carriers over the BB10 mobile OS and the new devices. Then, a CIBC analyst upgraded the stock to "outperform" based on optimism over BlackBerry 10 upgrades. But with shares wildly outperforming broader telecom and mobile producers, the market has now reflected this optimism. At this point, playing "sheep" is no way to outperformance.
At 0.66x book value, no debt, and a third of the market cap backed by cash, RIM may not implode entirely. But FBR Capital and Barclays have $6.50 to $7 price targets for a reason. The National Transportation Safety Board recently stated that it would drop BlackBerrys and switch them with iPhones after experiencing functional failures. According to the NTSB: "[We] require effective, reliable, and stable communication capabilities to carry out [our] primary investigative mission", but BlackBerrys "have been failing both at inopportune times and at an unacceptable rate". Ouch! Several government organizations have already abandoned the BlackBerry. Maybe it’s time investors do the same?
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!