Is Nokia Down or Bound to Turnaround?

I recommended Nokia (NYSE: NOK) as a solid buy a month ago – in the time since then it is down 25%.  Am I backing out on that recommendation?  Definitely not.  The stock has been down mainly due to last quarter’s earnings reports as they landed below the estimates.  Does this mean the company is fundamentally weaker than it was a month ago?  I don’t think so.  Nokia knew that its lineup of phones was falling behind other companies: Apple (NASDAQ:AAPL) and then Motorola (NYSE: MMI) and the rest of the Android Gang on the high end, and Chinese mass produced dumbphones on the lower end.  They knew that their margins were falling and their profit was dropping with it.  That is old news – but it is only now that Wall Street is reacting fully to it. I would not recommend investing in this stock if that was still the case but the company is changing course.  Now we have that cleared up, why it is that I recommended Nokia in the first place?

I had three main points in my previous article and here they are summarized.  The company is huge and still the worldwide leader in market share.  As such, they have a massive base of experience and personnel to draw on and distribution networks all over the globe.  They have recently announced that they’ve gone all in with Microsoft on the new Windows Phone and Microsoft (NASDAQ: MSFT) has said that they have a special relationship with Nokia.  CEO Stephen Elop has already initiated a number of measures to revive the company and make it a leaner operation focusing on their core operations as a handset maker.  As proof they ditched Symbian and have cut costs by automating more jobs and moving the rest to Asia.  As a kicker and something I didn’t mention explicitly in my previous article Nokia has $4.02 in cash per share.  In case you haven’t already checked the stock is worth $4.07 as of this morning… you can get the massive corporation of Nokia with a number of great phones in the pipeline for $.07?  Count me in.

So that’s why I recommended the company a month ago.  Now let’s see what has changed.  The Q1 stats came out and revenue was down 35%.  This knocked down the stock but is this really such a surprise?  Who wants to buy a Symbian phone when Nokia said they are ending the OS?  But of course the emotional and sometimes irrational Wall Street is going to bring the stock price down and this seems to me like a great time to buy in.  The new products and organizational changes won’t affect the bottom line for another 3-6 months.  Now admittedly there were a few slip ups.  Nokia released their prized new Windows Phone, the Lumia 900, on Easter Sunday (not sure who decided that) and then there was a slight bug in the operating system but that was fixed within two days and all users affected by it got full refunds.  So while everyone is downgrading Nokia on news that should have been predictable let’s look at what is going right.

Amazon.com keeps a list of best selling smart phones with plans on their website and the Lumia has been on top since the day it was released.  Check out the reviews for a taste of what customers are saying, the average is 5 star as of 4/17/11.  But Amazon isn’t the main source of the Lumia 900, their main seller is AT&T who has an exclusive contract with Nokia to sell the phone.  And AT&T plans to make the most of this exclusivity.  They announced that they will push the Lumia with more advertising dollars than they spent on the iPhone and add this to the marketing that Nokia itself is putting behind the device and you have a powerful combination.  The success isn’t the only positive the phone is bringing to the company; beyond just increasing Nokia’s revenue it is boosting the profit margin itself as they are making much more per phone with the Lumia series than they did with Symbian or their feature phones.  As they release more top of the line smart phones the company will come back into the limelight and their net income will likely buck its recent downward trend.  In case you haven’t been following the company they have a low price point tablet in the works and will be one of the first companies to release phones and tablets on Windows 8, Microsoft’s bid into the world of mobile operating systems.

The company isn’t quite in the clear yet.  They have had success with the Lumia 900 but that success has not been astounding by any means.  So the verdict is still out but with a solid contender for a number three spot in the smartphone market, more phones in the pipeline, a huge supporter in Microsoft, and even a bargain priced tablet, Nokia has lots of potential to improve its position and thus I am long on the stock.  Now with all of that said the stock may still go down but historically it has been rare that a stock will go much below their cash per share and Nokia is right at that level.  So I encourage you to go out to your local AT&T, check out the phones, read the reviews, and come a Foolish decision!

Ready to Play with Activision

I like to be in the know – I’m going to assume you do as well.  And I think that Activision (NASDAQ: ATVI) is something you should be enlightened about.  The company makes some darn good games that are just plain fun to play.  When StarCraft came out I loved it and played it with friends for months.  Based on personal experience and an in-depth analysis, I think the company is a solid buy.  I am going to cover three main areas that make Activisionattractive and then detail a few reasons that may make you have second thoughts.  From that point you can do some further analysis with a bit of an edge on your counterparts, and hey, maybe it’ll lead to you making a great stock choice!

First off Activision is well known and respected in the gaming industry.  This does not mean they are set in their ways but rather means that gamers know they make quality and long-lasting games  Some say that Apple (NASDAQ: AAPL) may infringe on their business but let’s get real.  Apple makes great games for the iPhone and iPad.  They make games that are lots of fun for very casual gamers and I am sure they will continue to do it successfully.  But for people who want an immersive experience with massive worlds and tens of thousands of other gamers to interact with – Activison has the solution and Apple doesn’t.  Activision has the world’s largest online multiplayer game in World of Warcraft, they developed a number of the record breaking Xbox games in the Call of Duty series and the extremely lucrative Guitar Hero packages, and have PC classics with cult like followings in StarCraft and Diablo.  Many of these games are still driving in solid revenue for the company.  They have successes on almost every gaming platform with a history of long staying power.

The second is that for their number one position in the gaming industry as well as their strong balance sheet and income statement, their stock seems to be very reasonably priced.  Both the company’s net income and profit margin have increased the past 4 years yet the price has held relatively steady.  The company has $3.5 billion in cash which allows it to put $650 million into developing new games and technologies like it did in 2011.  With a trailing P/E of 13.75 and a forward P/E of 11.82 the company is hard to call expensive.  In addition, and quite impressively, the company has basically no debt.  The company is extremely profitable and is pouring money into research to become more profitable while lowering costs.  Sounds like a recipe for success to me.

 

Third is that they already have lasting value and are working hard on future games which will be greatly successful in the long run.  The company has had fantastic success with subscription games and is trying to increase and replicate this success by incorporating systems in games where players can trade in game weapons and supplies for real world money.  There is already a large black market for this and they are simply capitalizing on this.  In addition and more important to milking their current successes, ATVI has some great and even “game changing” releases in the works.

They are releasing Diablo III, the 10-years-in-the-making PC title which has quite a bit of hype surrounding it and will be snapped up by the still loyal players of Diablo II.  Estimates for first year games sales are at 5 million and even if it only reaches a more conservative 4.5 million or so, at $60 retail per game, that will inject a huge amount of cash into the company for further game development.  Additionally they are innovating with games like Skylanders where ATVI sells small figurines which unlock features of the game which, importantly to shareholders, have very high profit margins.  The company has also gotten rights to develop the new Transformers games as well as the next installment of Call of Duty.  Finally the game that could be the biggest boon for ATVI is currently codenamed “Titan” and is still in the early development stage butaccording to COO Paul Sams it is “the most ambitious thing we’ve ever attempted…  And I feel like we have set our company up to succeed on that. We have some of our most talented and most experienced developers on that team.”

Now for a few negatives. Activision hasn’t moved much at all since 2009 and so what is going to make them move now?  Well to be blunt they might not move in the next six months.  So if you’re in it for the short term this may not be the stock for you.  The company has had a slight decline in its subscriptions to WoW over the past few periods which may indicate that the game is losing its sway over members – a bad sign for one of the most profitable segments of the company.  The competition is always searching for the next game which will let them overtake WoW or surpass the success of Call of Duty and this possibility cannot be completely ignored.  Finally the overall gaming industry has been down the last two years and this may roll over and impact ATVI in a more substantial way as time progresses.  Phew, glad I got all of that out of the way.

There has been a lot of Foolish discussion about Activision of late and I wanted to give readers a broad overview of the company – a jumping point from which to continue your research.  The company has a team with a history of innovation and success, some awesome looking games in the pipeline, loyal fans, and a rock solid financial foundation.  Though it may not sky rocket in the next few months I think this company has some potential and should be considered for anyone who wants a gaming stock with little obvious downside and great growth opportunities.

BAC Regaining its Former Glory?

The town I grew up in had a Bank of America Center on the main street, my school had a Bank of America  conference room, we even had two BAC’s within walking distance of my house – you could say they had quite the presence.  And this isn’t unique to my hometown.  It’s called Bank of America for a reason.  Yes, it is clear now that BAC did some things wrong leading up to the crash in 2009 and they still do not have everything straightened out, but the company has such a large base in the US that as the economy rights itself, this bargain priced stock is bound to grow with it.

They have lost respect on a national level and their balance sheet isn’t looking too pretty.  Do I think the stock is a good buy right now?  I sure do.  It is the very fact that they did a number of things wrong in the last 5 years that makes their current price so attractive. They may have lost a lot of brownie points on superficial levels but the intrinsic value of the stock hasn’t gone down nearly as much as it may seem.

The company has a book value per share of $20 and just last week they passed the Fed’s stress tests which gave their stock quite a boost.  The stress test demonstrated that the company has enough capital to survive another economic downturn and with this capital is earnings potential for the company.  Bank of America has been involved in some huge cost cutting operations of late as well as an effort to raise additional capital and dispose of non-core business aspects.  They haven’t been trying to make headlines; they’ve been keeping under the radar and restoring all of their vitals.  CEO Brian Moynihan has had one focus and that has been to lower expenses and become a leaner operation.  Now in addition to cutting costs they want to make a profit and this may mean more charges which will irk customers.  They’ve gotten their share of bad press for this, but they haven’t been alone in some unfair fees. BAC has also had its fill of legal battles since ‘09, some of which resulted in a decent loss of cash, but it seems to have most of this behind it, and that is reason for hope.

BAC has a few scary financials with the main one being that debt exceeds total cash by $100 billion.  For me this is offset somewhat by the above mentioned book value of $20.  Though with BAC planning to write down 200,000 mortgages currently facing foreclosure, this number may go down – but unless there are more drastic write downs coming soon it is likely that book value will stay above the stock price for the time being which for me is often a signal to think about buying in.  They have not been focused on giving out meager dividends to satisfy investors but instead have put this money back into the company to help get the debt monster off of their back.  Personally I would much prefer my stock to have a more solid financial foundation which causes it to go up by 5-10% than get a 1% dividend.  BAC has also been focusing on operations in the US which has allowed it to be protected somewhat from recent European debt related price declines.

So yes they have been moving in the right direction but this doesn’t mean that they are all the way in the clear.  BAC has wide exposure to a number of liabilities and if the economy takes a turn for the worse again they will be on a slippery slope.  This comes down to a matter of personal judgment.  If you think the economy is going to keep headed up for a while and that Europe’s situation is stabilized for the time being, BAC’s debt may not be your biggest worry; while on the other hand, if you are unsure about the future of the economy, you might want to take a closer look.

There are other major banks who I would argue are in a better overall position.  Wells Fargo being one of them.  Wells Fargo’s stock  has done quite well the last 6 months; they just raised their dividend, and they didn’t get the bad wrap that BAC did with the economic downturn.  But there is one major difference and that is one of price.  BAC may be in a slightly worse position, but for how much better of a bargain it is, that doesn’t concern me.  I feel like I am getting more for my money with BAC.

For me this can be the ideal type of stock.  It has been declining in both price and reputation for the last 5 years making it a real deal.  Yet despite this reputation decrease, Bank of America still has massive assets in the United States and it seems to be making a turnaround.  The economy, at least for the time being, seems to be on a somewhat upward track, and as the economy goes up it is likely that BAC will follow.

If you think that Bank of America will be here for the long haul and you agree that they are undervalued right now then it is a hard argument not to get it.  If you are wary of the debt and exposure to liability that BAC has then I would either do some more research or sit this one out.