Is Nokia the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Nokia (NYSE: NOK  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Nokia.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.6% Fail
  1-Year Revenue Growth > 12% 5.1% Fail
Margins Gross Margin > 35% 29.8% Fail
  Net Margin > 15% 4.3% Fail
Balance Sheet Debt to Equity < 50% 29.5% Pass
  Current Ratio > 1.3 1.65 Pass
Opportunities Return on Equity > 15% 8.8% Fail
Valuation Normalized P/E < 20 17.48 Pass
Dividends Current Yield > 2% 6.8% Pass
  5-Year Dividend Growth > 10% 1.6% Fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Nokia calls in with just four points. The cell phone maker once dominated the industry, but it has been slow to evolve in the new smartphone revolution.

Nokia was an innovator in mobile technology, transforming its original paper mill business in the late 1960s. As late as 2008, the company had an estimated 40% market share of the global mobile market and also derived a significant portion of its revenue from related businesses like network infrastructure and enterprise solutions.

Nokia, however, has been slow to respond to advances in mobile technology from Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) , whose offerings have dominated the high-end market for consumers and business, respectively. And with all the pressure that Google's (Nasdaq: GOOG  ) Android will put on the industry, Nokia simply isn't keeping pace.

But Nokia isn't giving up. In February, it announced an alliance with Microsoft (Nasdaq: MSFT  ) whereby Nokia would use Windows Phone 7 rather than developing its own in-house platform. The move could bring Nokia back into the limelight, although much depends on whether Microsoft can truly compete with Android and Apple's iOS.

For now, Nokia isn't perfect. But given the topsy-turvy world of mobile technology, all it would take is a single hit for Nokia to start moving in the right direction again.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Nokia to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Microsoft, as well as creating a diagonal call position in Microsoft and a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2011, at 3:58 PM, techy46 wrote:

    Nokia's really cheap with all the Applamania baked in and the perfect opportunity to lower cost, increase margins and gain traction against Apple and Android. Tommorrow, Microsoft will preview WP 7.5 with over 500 new features and over 6 new handsets from major vendors including Dell, HTC and Samsung. It ain't over yet. LONG AAPL INTC MSFT NOK TSM XLF XLU

  • Report this Comment On May 23, 2011, at 5:04 PM, sapiska wrote:

    Different way to calculate the company:

    NOK market cap $31 billion (@ $8.15)

    Assets:

    + 50% of the Nokia Siemens Networks $7 billion (calculated from Alcatel-Lucent value, a bit smaller company)

    + 100% of the Navteq digital gps-maps $8 billion (paid this in 2007)

    + Cash after debt $9 billion

    + Patents and other IPR $4 billion (maybe more)

    Total: $28 billion

    Value of the Nokia Mobile Phone Business including dumb-, feature- and smartphones, selling 25% of the global mobile phones with 10% profit margin: $3 billion

    $31 billion - ($28 billion + $3 billion) = 0, checked.

    Again: Nokia sold over 100 million mobile phones during the last quarter (Q1/11, January to March). They are selling more phones this year than there are people in the United States. They have not made any quarter in loss since 1990'es.

    Once again: Value of this business is three billion dollars.

    There are 100 million shares sold short in NYSE and 200 million in Nasdaq OMX Nordic. If you stop fearing that this company will go bankcrupt because Apple sells 16 million mobile phones in quarter and will eat Nokia, those short sellers will see a historical squeeze.

  • Report this Comment On May 23, 2011, at 7:35 PM, cbglobal wrote:

    RIM - Research in Motion actually scores Pass on all the above measures except dividends.

    However; if you count the 10% stock repurchases as being similar to dividends, then it passes all measures.

  • Report this Comment On May 24, 2011, at 1:54 AM, sapiska wrote:

    RIM market cap is $22 billion, NOK $30 billion. (1-2 months ago RIM was bigger than NOK before the profit warning). Excluding cash RIM is $17 billion and NOK $20 billion. They are both cheap, but NOK is extremely cheap.

    On the market NOK sells twice as much smart phones as RIM if you look only to smart phones, like every 24 years old "analyst" is doing and comparing "Apples to Oranges". RIM focuses to smartphones, NOK does every kind of phones, networks and global services.

    The new Gartner statistics about communication devices sold in Q1/11 is here: http://www.gartner.com/it/page.jsp?id=1689814

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