Wireless Stock Watch: Nokia, a bad news buy

It's not hard to see why. There is a softness in demand for cellphones in Eastern Europe and Latin America, and there is a worry that incremental sales will come from lower margin products over the next year as Nokia loses its grasp on the high-end market for phones. Just this week, shares of Nokia have fallen more than 6% to $14.79.

While the U.S. market has been a tough one for Nokia, management is working hard at making inroads with U.S. wireless carriers. Sales of Nokia's handsets will be down about 10 percent this year, but I expect them to be up 11 percent next year as the economy improves and people decide to upgrade. Another driver of growth -- a glut of inventory has cleared up, paving the way for increased sales.

Outside of the U.S., Nokia is also well-positioned for growth especially in emerging markets. In China and India, Nokia can use its heft and scale to manufacture low-end phones more cost effectively than competitors. That will give it an edge in driving sales in developing countries. When smartphones hit these markets, Nokia will be in the driver's seat.

Another reason to like the company: Nokia is super innovative. It just announced the development of a prototype charging system based on wireless electricity. Scientists at the Nokia Research Centre in Cambridge, England, developed the prototype by harvesting electricity from electromagnetic energy. It could one day revolutionize the cellphone business.

And Nokia has created phones that can download and play movies from Amazon's (NASDAQ: AMZN) Unbox Video Player service, for instance, and that come with Adobe's flash technology built in -- something the iPhone does not have.

In India, Nokia just announced that it was rolling out its "Life Tools" product, which will deliver news, entertainment, educational and agriculture services straight to the handset. Its a program designed to help bridge the information gap in emerging countries.

All this has me optimistic about the prospects for Nokia -- and for its stock. Shares of NOK have a trailing price-to-earnings ratio of 10.1 compared to its five-year average of 15. And its PE is far more attractive than Research In Motion's at 23. The company also has a strong balance sheet with over $11 billion in cash and $4 billion in long term debt -- and the stock offers a 3.5 percent dividend yield, dwarfing the industry average of 2.2 percent.

Currently trading around one times 2010 expected revenue, I think the shares, in a recovering market, could easily trade closer to 1.5 times revenue -- its historical average. At that rate, you get a target price of $23 per share in the next 12 months, an increase of 55%.

Nikhil Hutheesing is the former editor of Forbes Wireless Stock Watch, an investment newsletter. He recently joined dailyfinance.com and bloggingstocks.com as assistant managing editor.