At one point in its history, this stock was synonymous with
success in the cellphonemarket . But not any longer.
During the past year, it has reported billions in operating
losses, closed several of its worldwide manufacturing sites, cut
tens of thousands of jobs, and has lowered the price of its
flagship products due to poor sales.
This company has faced bankruptcy before and could be
approaching it once again.Shares of the stock have plummeted about
47% year-to-date and look poised to drop further.
All of these reasons make the stock of Finnish cellphone maker,
, potentially an excellent short.
The picture wasn't always this grim. Between 1998 and 2011,
Nokia sold the most mobile phones in the world. Even today, Nokia
sells an average of one million phones a day.
But the company has bledmarket share as it's fallen behind more
innovative smartphone leaders, such as
. Between 2005 and 2010, while Apple was bringing its revolutionary
new iPhone and iPad technologies to market, Nokia was focusing on
developing low-end mobile phones. While it succeeded in making
mobile technology accessible to developing nations, it missed out
almost entirely on the smartphone revolution.
Now trying to play catch-up, the company has entered the
smartphone race, perhaps too late. It's teamed up with
to develop two new smartphones -- the Lumia 820 and 920 -- which
run on Microsoft's Windows 8 platform.
To generate sales for the 2012 holiday season, Nokia's Lumia
phones will be released in November -- in time to compete with
Apple's new iPhone 5. Industry analysts think Nokia will lose out
to Apple. They expect Nokia will sell less than four million phones
in the quarter. In contrast, Apple received more than two million
iPhone 5 orders in the first 24 hours the product was released! As
such, the holiday season could be the defining "make it or break
it" moment for Nokia.
The technical outlook for Nokia certainly looks foreboding.
At one point during the peak of the tech bubble in 2000, Nokia
traded north of $50 a share. Even in late 2008, it approached $40.
Amajor downtrend line can be drawn over theprice action of the past
two years beginning late January 2011. Since that time, the shares
has fallen more than 85%, from a high near $11.15, in early 2011,
to an all-time low of $1.63 in July 2012.
Since hitting this low, shares have rebounded, peaking at a high
of $3.39 in August, before settling back to current levels near
At this level, shares are again pushing against resistance,
dating back to the spring. Theminor uptrend line off the July low
currently intersects the chart at about $2.65. If this trendline is
broken, it's likely the old low near $1.63 would be retested.
As such, shorting the stock if the trendline was broken
couldyield gains of about 38%.
The technical outlook supports thebearish fundamentals.
For the upcoming quarter, analysts project poor phone sales will
cause revenue to drop 29% to $9 billion, from $12.7 billion in the
comparable year-ago period. For the full 2012 year, analysts expect
revenue will fall 24% to $38.3 billion, from $50.5 billion last
Theearnings picture is equally grim. For the upcoming quarter,
analysts predict slowing demand for Nokia phones will push the
company into a loss of 13 cents a share, from a gain of 4 cents in
the year-ago quarter. For the full 2012 year, earnings are also
expected to be negative, falling nearly a dollar, from 38 cents
last year, to a loss of 41 cents this year.
From a valuation standpoint, Nokia is poor. The company has
areturn on equity (ROE) of -36%. Its five-year projectedPEG ratio
(price-to-earnings divided by growth rate) is very high at 5.4. A
PEG of one or under is thought to represent good value while
anything over two is considered to be very pricey.
Risks to Consider:
If Nokia can use its Lumia phone to compete with the iPhone5,
the company stands a fighting chance of surviving. But if Nokia
phone sales are poor, as industry analysts expect, the company
could sink further, potentially reachingpenny stock status.
Action to take -->
Place a sell-on-stop order at $2.64, a few cents below the minor
uptrend line good until Friday, Oct. 19. Set a stop-loss at $3.41,
slightly above the August spike high. Set a target of $1.63 for a
potential 38% gain. Risk/reward ratio is 1.3:1.
This article originally appeared on TradingAuthority.com:
-- Dr. Melvin Pasternak
Melvin Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GOOG, MSFT in one or more if its "real money"
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