Pulling The Plug On Alcatel-Lucent

| About: Nokia Corporation (NOK)

My initial recommendation for Alcatel-Lucent (ALU) was back in November 26 when the stock was trading around $1.12 - please consider: Alcatel-Lucent: An Asset Based Opportunity.

Since then the stock has performed very well, giving anyone who bought on that recommendation ample time to book in profits. In fact, even if someone bought at higher prices he is still ahead. From the very beginning, I have said this is a turn-around situation play with above average appreciation potential. Indeed it has been just that.

But a piece of recent news might change everything.

What spooked me yesterday was this report by Bloomberg:

The French government is weighing options including an investment in Alcatel-Lucent SA as it looks to protect the unprofitable network equipment maker's patents, people with knowledge of the deliberations said.

Taking a minority stake in Alcatel-Lucent, potentially through the Fonds Strategique d'Investissement state vehicle, is among alternatives being considered by the French administration, said a government official, who asked not to be identified as he wasn't authorized to be cited by the media. Such a move would give France more influence at the company after a 2 billion-euro ($2.6 billion) financing deal criticized by officials, other people familiar with the matter said.

Other plans that have been considered by officials include encouraging a merger between Paris-based Alcatel-Lucent and rival Nokia Siemens Networks, or an investment in Alcatel-Lucent's undersea cable business, said the people.

Let me tell you what this all means, because I am from Europe and I know how French bureaucrats think (they think the same like Greek bureaucrats).

They really don't care about the company or protecting its patent portfolio. They also don't care about the shareholders. The only thing they care about is for the company not to lay-off any more people while it is in reorganization mode. It has more to do with preventing the unemployment rate in France from going up than anything else. In other words, politics is the only think on their minds.

My original thesis on Alcatel-Lucent did not involve the French government taking a stake in the company. I did not have massive dilution in mind, that shareholders might incur if the French state were to buy a stake in the company. Neither was having a bunch of French Bureaucrats running the company or telling management what to do.

As such, if the French government were indeed to take a stake in the company, that would change everything I have said so far and that would change my stance on the company and the stock.

While I still think that the company can manage on its own and fix its balance sheet and return to profitability longer term, the idea that the French government might get involved in the company has spooked me.

As a side note, Nokia (NYSE:NOK) might benefit from all this if - as reported - Nokia Siemens Networks is bought out or merged with Alcatel-Lucent. At least Nokia shareholders will get something out of all this, if the French government's involvement proves to be detrimental to Alcatel-Lucent shareholders (and I think it will).

On a technical note, the chart does not provide much comfort. Short-term traders in the stock have probably already acted on the different sell signals this chart has given.

(Click to enlarge)

Bottom line

There is an old saying in the market, "No one ever lost money selling at a profit." So if you bought this stock on my recommendation and you still have profits, I would sell until the French government's involvement in the company is cleared.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.