Is Nokia Undervalued?

With shares of Nokia (NYSE:NOK) trading around $3, is NOK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Nokia operates as a mobile communications company worldwide. It designs and develops mobile products and services; provides digital map information and related location-based content and services for mobile navigation devices, automotive navigation systems, Internet-based mapping applications; and provides mobile and fixed network infrastructure, communications and networks service platforms, as well as professional services and business solutions, to operators and service providers. Nokia operates in three segments: Devices & Services, HERE, and Nokia Siemens Networks. The mobile movement is very hot at the moment and if executed correctly, Nokia may be able to see significant profits. Should Nokia provide more relevant mobile products, look for it to become a major player in the space once again.

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T = Technicals on the Stock Chart are Mixed

Nokia stock has witnessed a violent downtrend extending back to late 2007. In the last five years, the stock has gone from near $40 per share to $3. Nokia stock is now seeing a strong bounce from lows that, if held and continued, may signal a reversal in trend. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Nokia is trading around its rising key averages which signal neutral price action in the near-term.

NOK

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Nokia options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Nokia Options

59.12%

93%

90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Nokia’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Nokia look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

13.64%

-87.10%

-778.57%

-537.50%

Revenue Growth (Y-O-Y)

-23.40%

-20.68%

-23.13%

-29.56%

Earnings Reaction

-12.93%

-8.92%

-5%

6.49%

Nokia has seen improving earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have not been too excited with Nokia’s recent earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Nokia stock done relative to its peers, Ericsson (NASDAQ:ERIC), Research In Motion (NASDAQ:BBRY), Apple (NASDAQ:AAPL), and sector?

Nokia

Ericsson

Research In Motion

Apple

Sector

Year-to-Date Return

-13.04%

15.45%

14.66%

-16.39%

5.46%

Nokia has been a relative performance leader, year-to-date.

Conclusion

Nokia provides technology for the use in many platforms ranging from mobile devices to navigation and networks. The stock has not done so well in recent years but is now exhibiting a strong bounce after establishing lows last year. Over the last four quarters, earnings have improved while revenue figures have decreased, but overall, investors have not been too pleased with the company. Relative to its peers and sector, Nokia has been a poor relative performer, year-to-date. WAIT AND SEE what Nokia does this coming quarter.

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