You Could Double Your Money with this “Gutter Stock”
When it comes to investing, I like playing in the gutter. My goal is to locate stocks that have fallen into disregard and are downright hated by most investors, yet retain enough value to create strong odds of a rebound.
This is value investing at its very core — low price with high intrinsic value. When searching for these types of gems, you can throw technical analysis and other price-based methods out the window. Even my pullback system becomes irrelevant in a few of the deep-value opportunities available. But once located through fundamental research, technical analysis can come into play as a tool to time your purchase. Today I’ve found a big-name stock that has taken a beating, but still represents deep value.
#-ad_banner-#That company is Nokia (NYSE: NOK). This Finnish mobile phone handset maker went from being Wall Street‘s darling to wallowing in the gutter in a short period of time. Shares have plunged more than 60% in the past year, under the weight of a rash of analyst downgrades and negative news.
Today, this company trades for under $3 and has a market cap of $10.9 billion. In the past, it was the world’s largest seller of mobile phones — and it still represents 20% of the market today. In fact, it still sells twice as many mobile phones than Apple (Nasdaq: AAPL) does.
What on Earth happened to this once mighty, leading company? Basically, Nokia made severe missteps when consumers transitioned from regular mobile phones to smartphones. Phones incorporating the company’s ill-fated Symbian operating system simply could not compete with Apple’s iPhone or even approach the popularity of struggling Research in Motion (Nasdaq: RIMM) with its corporate-targeted BlackBerry.
The good news is, the company still has the distribution channels and everything else it needs to get back on top — it just hasn’t had the hot product. This may be changing with the recent launch of the Lumia smartphone line, which uses an operating system provided by Microsoft (Nasdaq: MSFT).
With the backing of Microsoft, Nokia has been upgrading all of its operating systems from Symbian to the Window’s phone operating system. T-Mobile and AT&T (NYSE: T) distribute the company’s Lumia line of smartphones in the United States, and have so far exceeded sales expectations. In fact, AT&T plans on spending $150 million on marketing the Lumia 900 — a campaign that is expected to be the largest ever for a smartphone — even larger than the marketing effort behind Apple’s iPhone. Different models of the Lumia line have been launched around the world to generally very positive reviews.
Nokia also has an extensive patent portfolio that produces about $500 million a year in royalty income. Recent aggressive legal action by the company, in regard to enforcing its patent rights, makes it likely that the patent income will increase over time.
In fact, income from patent rights has already started to roll in. On April 21, in a joint press release from Nokia and Microsoft, the companies announced further details about their partnership. “In recognition of the unique nature of Nokia’s agreement with Microsoft and the contributions that Nokia is providing, Nokia will receive payments measured in the billions of dollars… Nokia will also receive additional payments as part of an intellectual property exchange.”
And like any other smart company facing hard times, Nokia has given cost reduction a leading role in the turnaround. It’s moving all its production facilities from Europe to Asia, which is expected to save the company about $930 million annually.
Risks To Consider: Despite the positive fundamentals and changes taking place within Nokia, the company is still losing money every quarter. It is in a significant decline and some analysts believe there is a real risk of bankruptcy in the near future. Investors need to weigh this risk with the odds of a turnaround prior to buying shares.
Action to Take –> It is clear that Nokia is in a transitional period right now. I think the company contains enough value to create strong odds of a rebound. Not only is this company sitting on $12 billion of cash, but at the current price, this stock has a forward annual dividend yield of nearly 7% and trailing yield of over 10%.
The positive response from its new line of Lumia smartphones combined with its cost-cutting efforts create a powerful buying signal. However, I would wait for a break above $2.75 for the first entry, and then buy again on a break above $3. I also recommend you set a stop loss at $2.50. My target price is $6.