In my recent article "The unbelievable upcoming resurgence of Nokia" I have illustrated the basic thesis that attracted me to the stock: A presumed cooperation between Microsoft (MSFT) and Nokia (NOK) in the smart phone market, which, I believe, could be the fundamental catalyst in the awakening of Nokia. Since I have mainly argued that I consider this investment idea to be contrarian in nature, and in anticipation of the upcoming Q2 numbers, I have added to (and doubled) my Nokia position at $1.86.
Considering that Q2 numbers may be disappointing in light of continued restructuring efforts in China, this move might seem risky to some investors - especially since I chose to invest via call options. I already elaborated on the over-punishment of Nokia in my other article and believe that the self-sustaining circle of analyst downgrades (which resulted in updated low analyst price targets) marks an interesting entry point. As indication of the extreme pessimism toward Nokia, investors should remind themselves that just 5 month ago, in February, Barclays Capital calculated a price target of $8 a share - at a time where Nokia's competitive position in the smart phone market was already well known and publicized.
Some analysts argue, that, because of declining prices of competing products such as the Android phone from Google (GOOG), sales at Nokia and Research in Motion (RIMM) will be hit. After all, smart phone data indicates that Apple's (AAPL) iPhone and Google's Android are clearly dominating the smart phone market. In that regard, analysts at FBR capital recently downgraded Nokia with a target price of $1.60. However, analysts and investors are too focused on current sales and not fully appreciating the measures Nokia takes in gaining track.
Not everything is as bad as Nokia bears want you to believe. For instance, I am convinced that restructuring efforts in China are not the ultimate solution to improving Nokia's competitive position. It is, however, a step in the right direction that allows the company to consolidate its manufacturing footprint which is likely to have a positive margin effect going forward. It can be assumed that management will elaborate on the restructuring efforts on the Q2 call. It all depends on how the market responds to the credibility of those efforts.
With a P/B of only 0.5 the company remains deeply undervalued. The share price needs to double just for book and market value of equity to match. But also indicates that investors, nonetheless, are pricing in future losses that erode the company's equity.
On a technical note, I find the chart very appealing as a contrarian. In fact, the oversold sentiment makes a great basis for an investment. As can be seen in the chart below, the shares are in deeply oversold territory. I am also a believer in the gap theory, which stipulates that all gaps are required to be closed in a chart pattern. Nokia exhibits a 1$ gap between $4 and 5$. If Nokia can convince investors that restructuring measures are going to be fruitful with regard to margin improvement and Microsoft engages Nokia as its hardware builder, my experience with distressed equity investments shows that sentiment can change very quickly. These two very important catalysts could be instrumental to increase momentum in the stock to propel the stock to its upper bound trend canal at $5.
I am going to stand with my call option decision.
Disclosure: I am long NOK.