Ah, it's been a while since I wrote about Nokia (NOK), and many people were asking me why I haven't written about the company in a while. I believe that there are several new contributors like Andreas Hopf and Abu Bakr Hussain who are doing a good job of covering this company, and I felt like covering other companies for a while. I'm still invested in Nokia, though and still see it as a good investment. The question here is a little different though: would Carl Icahn also see Nokia as a good enough investment to put his money in it?
So, a lot of people heard the latest news that Carl Icahn is putting his money in Apple (AAPL), because he believes that the company is grossly undervalued. Mr. Icahn's announcement led to a rally in Apple's share price, and the company's investors are now more confident than they were in the last few months. Usually, when investors like Mr. Icahn put their money in a company, it acts as a "stamp of approval," and the activity becomes a major catalyst by itself.
Now we live in the Twitter age and we get a lot of breaking news from Twitter. Mr. Icahn announced his position in Apple in a Twitter post, and many people were pleasantly surprised. The next time Mr. Icahn puts his money in a company, he might utilize Twitter to pass the message and lead to another rally in another company. This is why a lot of investors will be "following" him on Twitter to find out his next pick before anyone else and get ahead of the game.
Could Nokia be Icahn's next pick? In order to find an answer to this question, we will have to look at Mr. Icahn's investment style, his investment criteria and compare them to how Nokia is today and determine if Nokia fits the bill.
Icahn looks for several things in a company before he puts his money and stamp of approval in it, leading the company's shares to rally substantially in the following days and weeks. First, the company has to be fundamentally undervalued. Second, the company must be unloved by the majority of the investors. Third, Mr. Icahn must believe that the company could have been run a little bit better (this is where his activism comes in). Fourth, the company's stock price should be at least somewhat volatile. Fifth, upon turnaround, the company should be able to result in great returns for its shareholders.
Now let's see how well Nokia fits these criteria. The first criterion calls for the company to be fundamentally cheap. The company could be trading near or below its book value, it could be trading in single-digit P/E ratio, or it could be cheap in any other metric that is seen to be important by the investors. Many times, Icahn's picks will not have positive earnings, but they might have a lot of assets, including but not limited to a lot of cash, making them cheap. For example, he bought a large amount of shares of Chesapeake Energy (CHK) last year when the company had negative earnings. Even though the company wasn't profitable at the time, it owned enough assets to make it cheap. As of last year, the company was trading for less than its book value. After buying nearly 10% of the company, Mr. Icahn was able to oust the former CEO Aubrey McClendon, which turned out to be pretty bullish for the investors. Currently, Nokia doesn't have much in terms of earnings, but it is another company that trades below its book value and only 0.3 times its earnings. I'm sure Icahn could see a lot of value in this company.
Moving onto the second criterion, Icahn looks for a company that's unloved by the majority of investors and analysts. He loves a heavily shorted company, and he loves it more if analysts are overly bearish about the company. The companies that are bashed heavily by investors and analysts will have the most potential for strong returns once the sentiment turns around. If we were to give an example, Icahn bought Netflix (NFLX) last summer when the company's share price was below $70 and it was heavily shorted. We all know what happened next and how Netflix shareholders tripled their money in as little as one year.
Going back to Nokia, is the company unloved enough for Icahn? Of the 19 analysts covering the stock, only 5 rate it as "buy" or "strong buy". The average price target of the analysts for the company is $3.45 which is 18% below Nokia's current value. The company is obviously unloved by the analysts. As for investors, they continue to short the company at strong levels. The institutions continue to stay away from this stock as its institutional ownership rate it as low as 12%. Basically, the company is unloved by the analysts, investors and institutions, which means it has a great potential to be loved by Icahn.
Third, Icahn usually buys stakes at companies where he feels like he can make a difference. Sometimes he believes that a company's management is not doing a good job of running the company, other times he believes that the company's management is not doing a good job of rewarding the investors. Usually, when Icahn buys stakes at a company to become an activist investor, either heads roll or the company increases its dividends and buybacks. We don't know how Icahn feels about Nokia's current management; however, given his history, he would probably force Nokia's management to become more proactive and more aggressive in its revenue generating efforts. Many people criticize Nokia's management to be overly conservative because Stephen Elop's management style doesn't involve a lot of heavy risks. Some investors blame him for the supply shortages faced by the company, as they believe that he didn't want to produce enough copies of Lumia phones fearing that they might not face much demand.
Fourth, Icahn likes volatile stocks, because it is easier for him to see results of his actions in volatile stocks that move strongly on either good or bad news. Icahn's latest pick, Apple, has been a very volatile stock in the last couple years, as it moves sharply in one direction or another each day, despite its massive size. It is very untypical for companies of Apple's size to be that volatile. When it comes to volatility, this is another area where Nokia is pretty strong. A year and half ago, Nokia was trading for $5 per share, last summer, the company was trading for $1.7 per share, and now, the company is trading a little above $4 per share. This is a great company where Icahn would be able to "work his magic" and see quick results, as his investment could potentially double or triple in a short time.
Fifth, Icahn loves companies that can result in great returns for the investors if turnaround efforts are successful. In fact, Icahn loves turnaround stories, and if there is one thing he loves more than turnaround stories, that is being part of those stories. Nokia is a great turnaround story, and if the company's turnaround is successful, it will result in great returns for the investors. Just to have an idea, the company was trading for $15 just a few years ago and it could easily go back there if the turnaround efforts are successful.
It looks like Nokia fits most (if not all) of Icahn's criteria. Of course this doesn't guarantee that Icahn will be buying shares of Nokia, but if he were to initiate a position in the company, that would be a major catalyst. Regardless of whether he invests in Nokia or not, the company is still a great investment when you consider the fact that it fits in Icahn's criteria, which means it must have a lot of potential, whether he sees that potential or not.