Is Nokia the Perfect Penny Stock?

Low-priced stocks are often low-priced for a reason: They have significant problems to overcome. Yet for those that have fixed their problems, they may be ready to take off to the next level.

At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning single-digit investments. We identify them with a penny icon, and by pairing up their opinions with companies trading for pennies on the dollar, relatively speaking, we may end up with more than just chump change.

Of course, just because a stock is low-priced, that isn't necessarily enough to suggest it will have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. But this week we look at cell phone giant Nokia (NYSE: NOK  ) , whose shares have lost two-thirds of their value even though they've bounced nearly 60% from their recent lows and today trade at just over $2.50 a share as the company tries to regain traction in the smartphone market.

Nokia snapshot

Market Cap $9.9 billion
Revenue (TTM) $43.6 billion
Return on Investment (27.8%)
Estimated 5-Year EPS Growth 4%
Dividend and Yield $0.25/9.8%
Recent Price $2.58
CAPS Rating (out of 5) **

Source: FinViz.com.Off the chartsYou're probably already tired of hearing about Apple's (Nasdaq: AAPL) apology for its mapping app on the new iPhone 5. While a rare misstep for the company that seeks to offer its consumers the best in highly functional programming as well as design, investors in Nokia and Research In Motion (Nasdaq: RIMM) shouldn't expect the faux pas to give their companies any real movement in selling more Lumias or BlackBerrys. No one is going to forgo buying an iPhone because its map app shows Madison Square Garden as green parkland instead of a sporting arena.

Both challengers to the Apple/Google (Nasdaq: GOOG  ) hegemony in smartphones are going to have to offer consumers tangible reasons that their products are not just as good as the iPhone or a Samsung Galaxy III, but are in ways better than the competition.

RIM is betting everything that the new BB10 OS due out early next year will be its game-changing event. Nokia is counting on having the new Windows OS effect a sea change in opinion. I've serious doubts that either will make a significant dent in market share.

Submerging hope
Both Nokia and RIM can point to their significant share in emerging markets as providing a floor for their resurgence. It was largely due to emerging markets that RIM surprised Wall Street with an earnings report that showed an increase in its subscriber base compared with the decline analysts were expecting. For Nokia, while China represents the single largest market for its phones, it derives almost half of its revenues from markets lumped under the broad heading "Other." Compared with its competitors, it has a substantially larger distribution network, particularly in China, India, and the Middle East and Africa.

Yet as RIM is discovering, it's the low-end market that's most popular in emerging markets because they're cheaper, not the newer smartphones upon which they're basing their comeback. And even Nokia admits its rivals are targeting that market, too, with lower-priced smartphones and feature phones that are below costs it can compete with. And though it's shedding its Symbian OS in favor of Microsoft's (Nasdaq: MSFT  ) Windows Phone, in certain markets it plans to continue promoting and selling Symbian phones till at least 2016, dragging out the pain that much longer.

Every day is Christmas
We have a much shorter time frame to see whether the Nokia-Microsoft alignment pays off than we do with RIM, since the new Lumias will be out before the end of the year. We'll see what kind of traction they get, and I'd imagine RIM investors will be able to make a more informed decision about whether BB10 will be able to dent its rivals' leads.

Considering the long, storied history of Nokia, the fact that it's selling at less than its book value makes it an interesting if not completely compelling investment. Others have noted its cash burn as a serious impediment to a turnaround, hence the hope the new Lumias catch fire quickly, though the current lineup of Lumias has not provided much confidence that the latest iterations will inflict much damage. Ultimately, Nokia's value may lie in its patents that it could sell off piecemeal or as part of a larger buyout.

Make some change
Investing in the belief that your company gets bought out before it runs out of cash is not a viable strategy, so I won't be changing my bet against it on Motley Fool CAPS, either. But let me know in the comments box below whether you think Nokia can remain a viable company and competitor in the smartphone arena.

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Fool contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, and Apple, as well creating a synthetic covered call position in Microsoft and a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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