Why Nokia Remains A Strong Buy Despite Different Analyst Opinions

Jan.29.13 | About: Nokia Corporation (NOK)

Nokia was sent down by nearly 10% last week after showing its 2012 results. This article shows why Nokia's future is brighter than most people believe. Here is list of reasons to think about:

I. Sentiment:

When you look at the average price targets for Nokia you find a pessimistic mean value of about 1,30 Euro ($1.80), while the stock currently trades over $4.

Most analysts have staid bearish and confirmed their sell-ratings within the last 6 months although the stock already has dramatically recovered from its lows. There is practically no other stock in the telecom sector with such a negative sentiment!

And more, the negative sentiment is confirmed with a high short ratio. According to MacroAxis, "based on latest financial disclosure Nokia Corporation has a Short Ratio of 4.9 times. This is 202.47% (!) higher than that of Communication Equipment industry".

Nokia is one of the most short sold stock in both in Helsinki and New York! The shorts are about 20% in Nokia´s total share number. This is a very huge number! Note that Apple´s (NASDAQ:AAPL) short interest is only around 1% and Samsung´s around 2%.

Conclusion: Nokia is viewed very negatively, especially in the US,where people in my opinion seem to be focused too much on home companies like Apple, Research in Motion (RIMM) etc.

As you know, the more negative sentiment exists for a stock, the more upside potential is there for it.

If the stock reaches new highs (4,80$), it could easily explode when shorties are forced to cover their positions!

II. Analyst ratings vs. Analysts holdings

While being bearish, key market players initiated or remarkably increased their long positions in Nokia within this last 6 months!

Look at the institutional holdings of the big guys reported at NASDAQ:

On September 30th, 2012 Goldman Sachs held the biggest portion which was increased by 89% in the 3rd quarter of 2012. Another big player, Morgan Stanley had increased its shares by 600% (!) in the same quarter. Although both companies have not yet reported their holdings to NASDAQ for the last quarter of 2012, it was revealed by Morgan Stanley that it has again increased its share volume in Nokia! In a side note to their re-iterated sell rating they wrote that "Morgan Stanley owns at least 1% of Nokia's shares." This is in any case more than it was on September 2012, when it was less than 1%.

Conclusion: Big market players buy Nokia stocks while at the same time rate the stock with "sell" or "overweight" and giving low price targets!

Why should they do this? Could it be that they know more than the average investor about Nokia's turnaround story going on?

III. Nokia bonds: Up, up and away!

While everybody is talking about the stock, Nokia's bonds have shown a tremendous rally within the last months-and even within the last week when the stock went down 10%!

The following graph shows an example of a Nokia-Bond expiring September 2019 (ISIN: US654902AB18)

The picture is the same for all issued Nokia bonds. Please note that Nokia has been downgraded last year to a Ba3 level-means nearly junk-status. If you look at the chart, you see that an upgrade could be necessary soon.

IV: The fundamentals

Recently there have been some good articles about Nokia's fundamentals in Seeking Alpha that tell us that,although it is not obvious, that a turnaround is on its way. Some of the following points are taken from a comment of a Seeking Alpha reader. They show that Nokia has done it's homework:

1) "Nokia´s stock price is still heavily undervalued.

NYSE tech stocks are usually 2x book value, Nokia is still way much below that (1x). According to Morningstar´s valuation, the sum of parts of Nokia (NSN, Navteq, feature phones, smartphones, patent portfolio and cash) is worth much more than Nokia´s stock price right now. Note that Nokia is currently selling at 0.3 price/sales ratio. This means that if the company manages to restructure and return to normal profitability, the stock has big upside potential - assuming the market will value Nokia 3.0x sales like Apple or Microsoft (NASDAQ:MSFT) it is a 10-time bagger. But even a price/sales ratio of 2, like Intel has, means a 6-time bagger from these levels.

Nokia: 0.3 Apple: 3.0 Intel: 2.0 Microsoft: 3.0

2) Nokia has increased net cash to about $5.7 billion. Nokia´s worst loss has been $290 million in a quarter in 2012. Even with this kind of loss, Nokia could still deal by its own net cash for at least 4 years!

3) Nokia has cut cost expenses. The layoff in 2012 starts to be fully effective in 2013. In the telephone conference of last week Nokia confirmed that the worst is done.

4) Although it might be a payer to Microsoft soon, Nokia has patent incomes from APPLE and RIM.

5) Nokia has managed to make the important tough work for the basis of its new platform WP. Nokia has already sold over 15 million Lumia phones up to date (9.9 million units from Lumia debut till the end of September 2012 + 4.4 million units in the last quarter of 2012).

6) Nokia has now a high end phone that can make "halo effects" and be compared to Apple´s and Samsung´s most high-end phone, the Lumia 920. The demand of this phone is still high in many countries around the world. The 4Q12´s Lumia sales did not include the sales of Lumia 920 in many countries, such as India, Asia-Pacific, UAE, Latin America, and many other countries around the world yet, because the phone is arriving these countries only starting from January 2013.

Even in Europe, many countries start to get this phone starting 1Q13, for example the Netherlands announced the phone arriving in January. And China Mobile received only first lot of Lumias 920T around Christmas, the second and third lot and further have arrived China, and the phone is still selling out.

7) China Mobile deal. When now, both China Mobile and China Unicom are subsidizing the Lumia 920 heavily, the 2-year or 3-year contract is starting from 0 or 1 yuan, and considering only less than 1/5 of Chinese people are using highest-end smartphones, this will result into a huge number of 2-year or 3-year contract users for Nokia in China! Besides, 3G penetration in China is still very low, there is a huge opportunity there. Additionally, among the highest end phones, Nokia Lumia 920 is significantly much cheaper than for example iPhone 5 and Galaxy Note II. Nokia has an advantage in both the price competition and the biggest carriers´ backing in China!"

8) Although Nokia is far behind in the US, it is very popular in some big emerging markets. For example Nokia is most trusted brand in India and has a good ranking in China!

9) NSN: Nokia Siemens Networks. During the last months NSN has won many 3G and 4G contracts in different countries. According to NSN, they have network equipment that can boost the speed of 4G many times faster. This shows that, besides PureView camera technology, HD+ sensitive screen technology, advanced mapping platform HERE and City Lens, that Nokia has also top innovations in building 4G LTE networks.

10) The big player Microsoft is pushing Windows 8. Nokia became within 2012 the far most important Windows 8 player with a Win8 market share of 70%.

11) Nokia remains a takeover target! With a total market value of about $15 billion Nokia is worth less than a quarter of Microsoft's net cash.

12) Nokia's production will ramp up and will become cheaper soon. With the new factory in Vietnam which is planned to start production in "not too distant future", Nokia will remain competitive towards Asian companies which attack Nokia's cheap and popular Asha phones.

13) No more dividend! All the years when Apple paid no dividend, the stock went up. Announcing a dividend seemed like a last sugar for small investors to stay in the market while the big players were already selling the stock. With Nokia it might just be the other way round.

14) Capital increase? Everybody became afraid last Thursday since Nokia wants to keep the possibility of a capital increase. Please note that this is nothing new! Every company wants this possibility. Nokia just renews an existing possibility of capital which would have ended in May this year. Nobody said that a capital increase will really take place.

If people talk about a default of Nokia they should keep in mind that this company was founded in the year 1865! Within the last century Nokia proofed more than one time that it could do a transition in its business: From paper to car wheels, then TVs, afterwards mobile phones. Why this story should not continue? While the company missed the smartphone trend 5 years ago and was overtaken not only by Apple and Samsung, one should not underestimate its ability to adapt themselves to changing market conditions.

V: Technical picture

Click to enlarge

The stock traded at its low last year in July at around $1.50. After a longer recovery Nokia formed a strong uptrend which started in November, just when the company released their first Windows 8 phones,the Lumia 820 and 920. Even after last week's drawback the uptrend remains. Only if the market would close below $4, the technical situation would change.

Conclusion

If you don't stick too much about what analysts are saying, there are enough arguments to be optimistic for Nokia in the mid-term.

My short-term target is $5.20. Within one, two years this stock could easily reach $10. Remember that one year ago it traded over $5 and the products were worse and restructuring just at the beginning. Now the time might come to earn some fruits.

Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.