Nokia: Major turnaround ahead?

by David Sterman, editor $100,000 Portfolio

Nokia (NOK), a once-great company, is struggling, and there is the real possibility that a hoped-for turnaround will simply never take root.

But the upside is so significant, and early signals from the turnaround are sufficiently promising, that I want to add it to our portfolio now -- before sentiment around the company changes.

Nokia was the world's dominant maker of cell phones long before Apple and Google entered the scene. Management has since had to make a series of very tough decisions, most of which have yet to pay off.

The shares are now close to $5, not far from the $4.50 lows seen in mid-December. Despite the gloomy stock price, an increasing number of technology journalists have come around to the view that Nokia's Lumia phones are quite compelling and can hold their own against the iPhone and Android phones.

Yet it's two other factors that could provide a huge tailwind for Nokia.

The first is Microsoft's software efforts. The software giant has been derided as an also-ran these days, living off the fat that Windows and Office software have generated.

Yet Microsoft's new software, which will have a consistent look and feel across PCs, tablets and (Nokia's smartphones), is garnering rave reviews.

I'm especially intrigued to see how Nokia phones incorporate Microsoft's Skype technology, which is still in beta testing. That could be a feature built right into the Microsoft operating system that compels consumers to switch from the Google/Apple duopoly.

To an extent, the success of the Lumia phones is beyond Nokia's control. Instead, it's up to the wireless service providers to get behind the offering. And they are, in a big way.

Major European carriers are now pushing Lumia phones pretty hard in their stores and in their advertising. That's also the case in a number of emerging markets, where the Nokia brand is still quite dominant.

Early sales results are promising, but there's a long way to go. Here in the United States, AT&T and T-Mobile are set to make a big push this spring and summer, and Verizon and Sprint may follow suit.

Why would these carriers bother? Because they have repeatedly stated that a world dominated by Apple and Google is bad for business. A third viable platform is in everyone's interest (except for Apple and Google).

Analysts expect Nokia to earn roughly $0.15 a share this year, with this figure moving up to the $0.30 to $0.35 range in 2013. The company currently has $10.9 billion in gross cash and $6.6 billion in net cash ($1.70 a share).

Unless Nokia really struggles in 2012 to meet fairly modest expectations, the shares likely have downside support in the $4 area. The stock should also find support from buyout speculation, if the turnaround fails to take shape.

On the upside, investors currently assume that the Lumia phones will make only a slight dent in Apple and Google's hegemony. The cumulative short position has risen to a recent 216 million shares, or 6% of the float.

The next month or two will provide a series of data points regarding global carrier adoption, but it will likely be the summer or the fall before we can truly determine whether Nokia is on the path to a robust turnaround.

For now, I am recommending a smaller-than-usual opening position in the stock, because I want to scale up my position only when more positive data points emerge.

Learn more about this financial newsletter at David Sterman's $100,000 Portfolio.