Nokia: Downside Risk Looks Limited (NYSE:NOK)

Nokia: Downside Risk Looks Limited (NYSE:NOK)


Long term chart looks bullish although no clear buy signal given yet.

Firm reports an earnings beat in Q2. Q3 earnings expectations also look bullish.

The firm’s financials are trending in a bullish fashion. 5G growth should power shares higher here.

The beauty of investing in a company such as Nokia (NOK) is that we have plenty of information to study due to how long the firm has been in business. Below is a long-term chart which goes back to 1994 so the technical information spans 26 years. We do not use long-term charts for trading purposes. What we use them for is to analyse the long-term underlying trends which are present on the chart and then formulate a trading strategy from that point. As chartists, we believe that any fundamental which could possibly affect the trajectory of the share-price has already been embedded in the technical chart. This includes Nokia’s growing 5G business. Furthermore Nokia’s assets and sales looks ultra-cheap compared to the average valuation multiples in this sector. However, Nokia’s valuation has been depressed for quite a number of years so we have to be careful here.

For example, below we see that Nokia shares actually held long-term support when they dropped aggressively at the start of the year. Despite the fact the 2020 lows bottomed at a higher point than the 2012 lows, Nokia stock has been in a bear market since 2007 (lower highs). If we get a convincing break-out above that 13-year down trend-line, then we could say with a great deal of certainty that Nokia´s bear market is over. At present, shares have been able to take out their 10-month moving average. They now need to do the same with the 50-month and then break-out above that multi-year trend-line.

From a trading perspective, Nokia brings a lot of advantages to the table. Shares are cheap ($4.14), its options are liquid and at present implied volatility in this month’s cycle comes in at almost 50% (see below). Therefore, if we were to trade Nokia before that potential long-term breakout, we would have to see very encouraging trends in the financials. The reason being is that when we put any form of long deltas to work (no matter how cheap the underlying is), we want to limit downside risk as much as possible.

Source: Interactive Brokers

Although sales dropped by just over $750 million in the same quarter, the firm managed to increase its gross margin, EBIT and net-income. These were impressive metrics given the slow-down in the services wing of the business in Q2. Furthermore, momentum is expected to continue in the third quarter with $0.07 in earnings the bottom-line number being predicted. This number, if achieved, would be once more a $0.01 increase over the same quarter of 12 months prior. Suffice it to say, if momentum continues, Nokia should see around 17%+ bottom-line growth this year.

Sales are also expected to increase by low single digit numbers over the next few years. When a cheap stock is growing its top-line and bottom-line, the market (being a for-looking indicator) usually prices the shares higher over time. The reason being is that higher sales invariably lead to higher earnings which then lead to more cash which can be used to buy more assets. Asset growth is essentially what drives growth in a firm. They are roots that bear the tree.

Furthermore, when we go to Nokia’s balance sheet, we see that the firm is holding almost $3 billion more in cash & ST investments compared to the second quarter of 12 months prior. This trend along with the decline in intangibles easily make up for the growth in interest-bearing debt. Suffice it to say, shareholder equity actually grew by almost $900 million on a rolling basis in this most recent second quarter.

Therefore, to sum up, although Nokia has not given a clear long-term buy signal as of yet, its recent financial trends definitely point to a probable breakout in the quarters to come. Downside risk looks limited by increasing earnings, sales and margins which should lead to a higher net-worth over time. If another severe downturn is ahead of us in the near-term, Nokia’s strong focus on cash-generation should enable the firm withstand any demand shocks. Let´s see how Q3 plays out.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NOK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Originally published on Seeking Alpha

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