Between Nokia And Research In Motion, RIM Is The Safer Play

Apr.20.12 | About: BlackBerry Ltd. (BBRY)

Trying to pick between Nokia (NYSE:NOK) and Research In Motion (RIMM) has the appearance of searching for the best of the worst. It is an exercise worth pursuing because as investors we are always on the lookout for price/value discrepancies. Remember that price is what you pay for a stock, and value is what you receive. On any given day, at any given time, the price paid for a stock is expected to be near the value of the stock, but the markets are full of emotion, and emotion distorts the connection between price and value. Since we know emotion is high with both Nokia and RIM, we know the odds are better than usual for opportunity.

Nokia recently reported earnings, and they came in as expected. No big surprise, here as they warned the Street ahead of time they were not going to make shareholders happy. Unhappy is putting it lightly too, with a first quarter 2012 loss of about $1.2 billion (930 million euros). Revenue is melting away like ice dropped on a hot summer roof. Nokia reported a 30% drop in revenue which not only can't help morale, but also means a reduction in the head count furthering the determination of staff morale. We all know how this plays out, the best and brightest able to find other employment jump ship as soon as they see the writing on the wall. Meanwhile, back on the ranch, what is left manning the ship generally is less skillful and experienced just when the company needs an improving team, not a diminishing one.

Play it again, Sam. The latest phone by Nokia is making headlines, and it appears AT&T (NYSE:T) is having a difficult time keeping the phones in stock. This does sound like good news and with a major carrier reporting brisk sales one may be forgiven for believing this is a turning point for Nokia. This is a rerun of the blockbuster movie produced by PALM not long ago. Hewlett-Packard (NYSE:HPQ) ended up buying PALM, and paid a pretty sweet price for the shareholders.

Looking back at the deal, Meg Whitman, who was not CEO at the time, undoubtedly wishes it was one less thing she has to deal with. When HP finally writes the whole thing off, like they did with their tablets not long ago, it will be good news for Nokia. At the same time Nokia is going to have a much harder time finding a suitor when HP was burnt so hard buying a loser. With that said, Nokia better find a way to repeat their great new 9000 and several more times on the double if they expect to stem the losses.

Microsoft (NASDAQ:MSFT) and Nokia work together currently, but at some point Microsoft may begin to embrace another model for the mobile OS. It appears plausible Microsoft looks to find other partners to keep pace with the Android system by Google (NASDAQ:GOOG) and the growing dominance of Apple (NASDAQ:AAPL). One easy way for Microsoft to divert resources of phone manufactures away from the Android system is to lower or eliminate the costs for phone makers like Samsung or HTC.This is more important to think about than it may appear at first. Oracle (NYSE:ORCL) is suing Google over Java inside the Android system, and they are not alone.

Manufacturers must be concerned about current litigation as well as wondering when the next shoe is going to drop.

Apple has indicated its willingness to use the court system for competitive advantage as well. This puts Microsoft in a front seat position to offer a mobile OS at a very low cost (not free but near) and STILL have their product cheaper a "free" Android system that may cause legal issues down the road. As soon as Microsoft figures out how to monetize in other ways Nokia could face very steep and advanced competition unlike anything it has seen up to date.

Looking at Ontario and the advantages RIM has makes it clear moves by Microsoft don't have nearly the direct impact as it would on Nokia. RIM's services create an ongoing revenue stream that other phone manufactures (other than Apple) do not enjoy (Google with Motorola could be considered another, but it's largely not relevant). Without a question, RIM is struggling in North America, and we are going to hear about it the loudest living here. Canada has not been immune from the iPhone either. Apple pushed aside RIM with the iPhone and is now the new leader in smartphone sales in Canada. It's not hard to figure out why so many doomsday scenarios are discussed.

What largely makes RIM so attractive to me is the option premium paid to protect portfolios, creating opportunity. If one is not greedy and looking for the proverbial "five bagger" with RIM, and willing to use fear to profit, options make a lot of sense. Instead of buying RIM at the current $13.40 and hoping it moves higher, one can write a covered call against the shares and lower the risk, as well as the needed price, to make a profit. June $14 strike calls can be sold for about $0.90, bringing the cost basis of the shares to about $12.50 each. If RIM does move higher, a covered call writer could make up to $1.50 a share in two months for a gain of about 12%. It may not be a home run, but I believe the return is very respectable, and given the lowered risk, the hedge makes sense to me.

Robert Weinstein uses information believed to be correct, but is not guaranteed and is not independently checked for accuracy. You may wish to use this article as a starting point of your own research with your financial planner.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM over the next 72 hours.