Nokia: Short, Long, Or Wait For The Tide To Turn

Jun.11.12 | About: Nokia Corporation (NOK)

There may be no stock that is more controversial with the financial bloggerati than Nokia (NYSE:NOK).

It is not my intention to recap the recent history of the company and the stock, except for a brief précis to the effect that in September, 2010 Nokia appointed a new CEO, Canadian Stephen Elop, the first non-Finnish CEO, who was clearly tasked with the job of turning the company around.

It was already apparent that the company which practically invented the cell phone was failing to innovate or respond to the marketplace quickly enough.

For example, Nokia was very slow to come out with dual SIM phones, which many customers like in certain markets, where they can subscribe to more than one cell phone service, and although Nokia marketed the first touch screen smart phones, it had been eclipsed by the overwhelming success of the Apple (NASDAQ:AAPL) iPhone and had failed to respond.

On 11th February, 2011, Nokia would unveil a new strategic alliance with Microsoft, and announced it would replace Nokia's in-house operating systems for smartphones, Symbian and MeeGo, with Microsoft Corporation's (NASDAQ:MSFT) Windows Phone operating system; except for mid-to-low-end devices which would continue to run under Symbian. After this announcement, Nokia's share price fell about 14%, its biggest drop since July 2009.

More than a year has gone by and Nokia's sales have continued to fall, with the company recently being officially overtaken by Samsung (OTC:SSNLF) as the world's leading manufacturer of cell phones by number. After paying out 27 cents annual dividend in early May, the stock had slumped futher, hitting a low of $2.61 on June 1st and again on June 4th.

Recently Nokia's debt was downgraded by Standard & Poors and other credit raters. They said:

While the agency was broadly positive about revenue growth from Nokia's Lumia smartphone line, the growth of this is not offsetting the decline of its Symbian OS business. It suggested that "smartphone revenues in absolute terms could start rising by the end of 2012, contributing to a stabilization of revenues in the Devices and Services division toward the end of 2012 or the beginning of 2013."

In a recent article in Seeking Alpha entitled Nokia, A Bad Situation Turning Worse the author suggests not buying into the stock until the end of the year when it will be clearer what the future of the company might be. Presumably he thinks that there will be an announcement in the Wall Street Journal to the effect that "Nokia Stock Will Start To Go Up Next Week After Today's Positive Earnings Report", which will give investors the time to climb aboard before the stock takes off.

The author says: The stock price will most likely decrease throughout the remainder of the year unless Nokia is able to reduce costs and generate impressive sales growth by the end of 2012. .. The stock price is around its 52 week bottom of $2.68

However, by the time the article was published the stock had closed on Friday, June 8th at $3.02, already a gain of about 15% from the low of $2.61 a week earlier.

Gong!

Now I don't want to appear to be simplistic, and in fact the author might be right. Maybe this is just a short term rally to lull in retail buyers, presaging further dumping of the stock by the big boys followed by new lows.

Ostensibly the recent rise appears to have something to do with unsubstantiated rumors that a Samsung takeover bid for Nokia is in the works.

How might such a rumor come about? Who knows? Perhaps CEO Stephen Elop booked a flight to Seoul, or maybe some oriental gentlemen visited a Nokia site with senior Nokia management. I don't know, though it seems like the rumor originated out of Finland.

But these kind of rumor-sparking events could mean anything. For example it is well known that Nokia would like to get out from under its share of the loss making Nokia-Siemens networks, which has accounted for a lot of Nokia red ink in recent quarters due to restructuring charges. Could Nokia have been fattening up the networks business for a planned sale? Maybe.

On the other hand a Swedish newspaper has it that Samsung is willing to offer 4 euros per share for Nokia. Again, I have no idea whether there is any accuracy in this report. However, CEO Stephen Elop categorically described as baseless any such rumor in London on Sunday, June 10th.

However my real point is this: If one believes that Nokia is potentially worth more than the current stock price, or that the company has a future, then it is no good waiting for the stock to go lower.

Personally I reduced my own short positions in Nokia consisting of long 2013 $2.50 puts and short July 2012 $3.50 puts, because they were showing profits of 100% and 75% respectively , and because I could not see the $2.50 puts ending up in the money in January 2013 due to the current book value of the stock being about $3.59.

Sure Nokia is a speculative play at this point, but the opportunity to make the really big money on a recovery is to get in close to the bottom and average down if necessary to lower the basis. It is not certain that $2.61 was a 2012 bottom, but it is certainly possible, and I no longer feel comfortable holding large short positions against my long positions.

I have no particular inside knowledge as to whether Nokia's turnaround will succeed, but if it does, I think the stock price will start to move upwards, perhaps by a significant percentage, before any positive news appears in the public arena. That is usually the way with most companies.

Disclosure: I am long NOK, MSFT, AAPL.