Top Picks 2007: John Christy's contrarian call on Nokia

Posted Dec 21st 2006 2:30PM by Steven Halpern
Filed under: Newsletters, Nokia Corp. (NOK), ETF Investing

Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Stocks Report.

Nokia Corp. (NYSE: NOK) is the favorite conservative stock pick from global investing expert John Christy. The editor of The Forbes International Investment Report says, "My thesis is that Finnish mobile phone maker Nokia used to be a classic European growth play, but now it represents a contrarian bet.

"A lot of folks are skeptical about the handset market -- market saturation, fierce competition, etc. -- and it's easy for cranky analysts to take potshots at them. That pessimism, however, is already reflected in Nokia's share price: It was only up 12% through early December, versus more than 20% for European stocks as a whole.

"It's also reflected in analysts' consensus estimates -- earnings per share are expected to rise 12% in 2007 and about 8% in 2008. That's nothing to write home about. Analysts are underestimating the strength of the mobile phone replacement and upgrade markets.

"Ten years ago the idea of a camera phone would have seemed nuts. I don't think anybody knows what bells and whistles phones will offer in the next ten years, so I think there's a lot of opportunity to keep driving innovation. Maybe not at the same clip as before, but still respectable.

"There's also a huge untapped opportunity for Nokia in emerging markets. Nokia's own estimate is for 3 billion worldwide cell phone users (total industry) versus about 900-odd-million today. That forecast might be rosy, but even if they fall short it still implies plenty of upside in the next few years.

"As people in these countries move up the food chain, it's a lot easier to afford a new Nokia phone than a computer -- and easier to justify splurging if it's more useful than just for making phone calls.

"I would concede that Nokia has lost a few battles to Motorola and Research in Motion in recent years (i.e., Nokia's traditional shape now looks a little clunky compared to the RAZR and other slimmer models), but I believe that it's still a more powerful global brand.

"Nokia has some very strong financials and offers attractive value. The stock trades at less than 14 times 2007 earnings with no debt, pays a dividend of nearly 2%, and has ROE in the 30% range. Nokia isn't the growth stock it once was, but that doesn't mean they can't make money, and it doesn't mean that you can't make money in the stock.

"Remember, it's also not trading at the multiple it used to fetch. At 35 times earnings, it was a lot to swallow for bearing the risk of a slowing handset market and other negative factors. At its current multiple, I think you have a much better margin of safety and the room for surprise is on the upside."

To see John's favorite speculative international stock for 2007, click here.

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