Events Trader #52: Buy this dirt cheap titan now

I have a new recommendation for you today. This is a stock that I have waited a long time to bring to your attention. And now is the perfect time to get in.

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4th May 2010

Buy this dirt cheap titan now

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I have a new recommendation for you today. This is a stock that I have waited a long time to bring to your attention. And now is the perfect to get in.

I'm talking about embattled phone giant Nokia. Two weeks ago the world's biggest mobile phone maker issued a pretty ugly set of results. And the stock plunged 19% in fright.

That is a hell of a collapse. And today I want to tell you why I think the market has completely overreacted. In fact I think you should waste no time in snapping up this stock.

Later I'll explain why I think the election will spark a rally for the pound. But let's get straight to Nokia first.

Why now is the perfect time to buy Nokia

It's been a rough ride for Nokia ever since Apple muscled into the smartphone market. With every iPhone charged set of results that Apple has published over the last year, Nokia has been marked down in analyst's minds.

Take the reaction over the past two weeks. On April 22nd Nokia published its set of quarterly results, showing a net profit of €349 million against analyst expectation of €409m.

On the day the results were published the stock plunged 14% to €9.70. And it's down another 5% since. Its fair to say the market took the news very badly.

As far as the market is concerned, Nokia is suffering in the high-end sector of the market (smart phones) because of competition from Apple - it didn't help that Apple came out with an outstanding set of results two days earlier. While in the lower end of the market (entry level phones) it is under attack by copycat Chinese companies.

But Nokia has been here before and has always managed to come back strongly through innovation and pricing. I would not read too much in a missed quarter. A 14% plunge in the share price seems a hell of an overreaction.

The fact is that Nokia is still leading the smartphone race, shipping a record 21.5 million units (twice that of its nearest competitor RIM) in the first quarter of this year. It is the lowest-cost producer in the handset market and about the same size as the next four-largest suppliers combined. This scale advantage isvital allowing it to cut costs to recover ground on competitors.

This is also a great time to get in on this stock. For one thing, you should always wait after a profit warning for the stock to stabilize. And this is now happening. The shares have fallen from €11.70 at the beginning of April down to €9.70 after the profit miss.

But the stock has also been hit hard by Greek debt crisis last week falling to €9.10 as European markets got caught up in the panic.

And if you look at the graph below, you will see that there is good support for the stocks at €9.00. I would expect the stock to gradually rebound in anticipation of further news.

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What you should do now

So I would go for a long position in anticipation of a possible bounce with a target around €10. And place a stop loss at €8.40.

The main risk with this position is that the market might fall further on some external news like the failure of the Greek bailout. But un this case I would still expect Nokia to outperform the market.

Because the stock is major and liquid you should be able to complete the purchase either through your broker or through your spread betting account. It is listed in Helsinki under the ticker NOK1V.

Recommendation: Buy Nokia at €9.04, stop loss at €8.40

How the election could kick-off a sterling rally

I can't leave this week without talking about the election. So far we haven't seen much in the way of firm plans for digging the country out of its hole.

The real fireworks will start after the election. I would not be surprised to see an emergency budget in the first few weeks of the new government. And it will have to be pretty strong medicine to regain confidence in the UK economy.

The prospect of a Greek style crisis in the UK is not conceivable - for the simple reason that the Bank of England can print banknotes to meet its obligations. But unless some sort of fiscal discipline is restored soon, confidence in the pound will fall away very quickly.

And that would be devastating for the health of the UK economy. You would see a rise in the long term interest rates and a consequent rise in borrowing costs. I think that could even cause the economy to tip back into recession.

So expect a hike in income tax to 21%, a rise in VAT to 19% and hopefully some deep cuts to the public sector and all the wasteful programmes that it runs.

Who will actually win the election? In my view we have two plausible scenarios. First, an outright win by the Conservatives - which would lead to a rally of the pound and of the equity market.

The other likely scenario is a hung parliament, where the Tory and the Lib Dem form a coalition government. In this case I would expect to see the market and the pound selling off in the first day only to rally from the next week onwards. Despite the discord we've seen between the parties so far, I believe they are prepared to work together. In this case we might get Vince Cable as chancellor and I think the markets would be pleased with such a choice.

In both these scenarios I think the market might not move a lot. But the election could still be a cause of resurgence in the economy. The fact is that the UK is one of the most stable countries in the world. And I am pretty sure that the politicians are aware that any squabbling would be detrimental to the country.

Also the calibre of the politicians is much better than some other countries. Brown, Clegg and Cameron would make for betters leaders than some of the continental Europe counterparties - notably Greece and Italy.

Before I let you go I just want to mention that Prudential will publish the prospectus for its rights issue tomorrow and is expected to price the new sharer at 140p a 75% discount to the 602p closing price before the deal was announced.

There are continuing rumours of a possible disposal of the UK and US business. That might bring in around £10bn and reduce the need for the right issue. But at this stage I think it`s too late.

That's all for me this week.

If you like you can contact me at my e-mail

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Riccardo Marzi

Events Trader

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Trader Portfolio
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Distressed Assets
IssueTip dateCompany/ AssetReccomendationPrice thenPrice now (4th May)Gain (%)
EVT #219/05/2009Barclays XS0110537429Buy6599.3152.78
EVT #219/05/2009Nationwide XS0284776274Buy4874.4355.06
EVT #1518/08/2009Barclays XS0205937336Buy60.782.7436.31
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Merger - Risk Arbitrage
IssueDateCompany/ AssetDetailsPrice now (4th May)Exp. Closing DateChange (%)
EVT #3024/11/2009Iberia (SM: IBLA);British Airways (LSE: BAY)Buy Iberia @ €2.02Short-sell British Airways @ 204pRatio IBLA 0.98: 1 BAYIBLA: €2.38;BAY: 216.3pQ4 20101.45%
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Other Trades
IssueDateType of TradeCompany/ AssetDetailsPrice now (4th May)Change (%)
EVT #2810/11/2009LongDragon Oil (LSE: DGO)Buy at 447p486.75p9%
EVT #3208/12/2010LongReaders Digest bond DBUY ISIN US755267AF83 at 1.5c$1.25-17%
EVT #5204/05/2010LongNokia (Helsinki: NOK1V)Buy at €9.04€9.040%
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IssueDateType of TradeCompany/ AssetDetailsPrice now (4th May)Change (%)
EVT #3208/12/2009LongING (AMS: INGA)Buy it if it falls below €5.40€6.39N/A
EVT #4016/02/2010LongICAP (AMS: IAP)Buy at 300p368.9pN/A
EVT #4309/03/2010LongMarine Harvest (OL:MHG)Buy it if it falls below 4.5 Kr5.4 KrN/A
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IssueDateType of tradeCompany/ AssetDetailsStatusGain (%)
EVT #219/05/2009Distressed assetLloyds XS0107228024Buy at 45-46Sold 10/11/09 at 8891.0%
EVT #326/05/2009Merger- risk arbitrageWyeth (US: WYE)Pfizer (US: PFE)Buy WyethShort-sell PfizerRatio WYE 1 : 0.985 PFEMerger completed 15/10/098.8%
EVT #723/06/2009Merger- risk arbitrageSchering Plough (US: SGP)Merck (US: MRK)Buy Schering-PloughShort-sell MerckRatio SGP 1 : 0.5767 MRKMerger completed 03/11/095.9%
EVT #1518/08/2009Distressed assetHBOS XS0353590366Buy at 52Sold 10/11/09 at 9990.3%
EVT #1518/08/2009Distressed assetRBS XS0193721544Buy at 65.4Sold 10/11/09 at 61-6.7%
EVT #1625/08/2009Index TradingiPath S&P 500 VIX (NYSE: VXX)Bought at $55 - 56.50Sold at $43.70 on 27/10/09-22.6%
EVT #1808/09/2009Distressed assetRBS XS0102480869Buy at 75Sold 10/11/09 at 68-9.3%
EVT #1915/09/2009ShortNational ExpressShort sell at 480pClosed short at 390p 19/10/0923%
EVT #2029/09/2009Options TradingVodafonePut option Strike 140November 2009 @ 6pSold at 10p 13/10/0967%
EVT #2026/05/2009Options TradingFTSE 100Put option Strike 5,100November 2009 @ £1.40Sold at £2.25 02/10/0960%
EVT #2704/11/2009Options TradingCadburyDecember 2009 Put, Strike 24p / December 2009 Put, Strike 740pSold 10/11/09 for negligible gain0%
EVT #3512/01/2010Options TradingCadburyBUY the Cadbury's March Put option, strike price 760p at 23pCLOSE POSITION AT 3-87%
EVT #3726/01/2010LongFTSE 100BUY the FTSE at 5,205 (midpoint)Closed at 5,155 02/02/10Loss of 55 points
EVT #1228/07/2009MergerSun MicroBuy Sun Micro only: 50% at $9.24; 50% at $9.15 (so average price $9.19)Merger completed3.37%
EVT #2206/10/2009MergerXeroxXRX: $8.88Merger Completed5.5%
EVT #2810/11/2009LongBNIBuy BNI at $97.60Merger Completed2.7%
EVT #2313/10/2009LongLadbrokes (LSE: LAD)Buy at 140p; double up if hits 120p: TARGET 180p147p5%
EVT #4323/02/2010CLOSEVT GroupBuy at 673p762p13%
EVT #3512/01/2010Merger*CLOSED* Buy 3Com at $7.64$7.90 (details on HP deal to follow)Q2 20103.40%
EVT #4916/04/2010ShortRyanair*CLOSED* Short at €3.90 (stop loss at €3.90)€3.900%
Closed average % gain13.31%

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. The share recommended is denominated in a currency other than sterling. The return from such shares may increase or decrease as a result of currency fluctuations. Please seek independent personal advice if necessary.

Spread betting is not suitable for everyone - ensure you fully understand the risks involved and never risk more than you can afford to lose. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit.

Figures are calculated using the closing mid-prices on the date on which shares are first recommended. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments.

Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.

Events Trader portfolio is not intended to represent the exact prices at which you could get in or out of a share. Our reference price is the price of our recommended shares at the time we wrote the recommendation. Sometimes readers will achieve better entry/exit prices; sometimes worse. This portfolio represents the value of our recommendations at the time our material is published.

Events Trader is issued by MoneyWeek Ltd. Registered office 7th Floor, Sea Containers House, Upper Ground, London SE1 9JD. Customer services: 0207 633 3604. Registered in England and Wales No 04016750. VAT No GB629 7287 94.

MoneyWeek is authorised and regulated by the Financial Services Authority. FSA No 509798.

2010 MoneyWeek Ltd.

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