When you look at the consumer tech landscape, there are clear winners and losers from a device perspective.
For instance, Google (GOOG) is winning the war on scale, with its now ubiquitous Android OS. When it comes to security, BlackBerry (BBRY) is the safest bet and comes out on top hands down. On price, it’s hard to beat the $159 Kindle Fire tablet from Amazon (AMZN).
But the most important metric for an investor isn’t megapixels in the camera or even raw device sales. The best smartphone stocks are the ones that are doing brisk sales but also running their businesses well enough that the profits come back to shareholders.
So while you probably have a favorite gadget manufacturer, put your feelings aside for a moment and let’s explore the three best smartphone stocks based on some hard metrics like revenue and valuation. We’ll also explore three dangerous investments to steer away from in the consumer tech space, even if you like their products for personal use.
Stock to Buy: Nokia
Yes, that Nokia (NOK) — the one that just killed its 143-year-old dividend thanks to continued quarterly losses and whose own CEO likened it to a “burning platform” in the Arctic Ocean.
Call me crazy, but I see upside from here as Nokia returns to profitability in the years ahead. Sure, shares have been obliterated in the last decade from nearly $60 per share to under $4 currently, and yes, Nokia failed to turn a profit in 2011 and 2012. But after posting its first profitable quarter since 2011, the company is forecast to break even in 2013.
Looking forward, Nokia has pinned its hopes on a Microsoft (MSFT) alliance. While this partnership hasn’t resulted in instant success, there was hopeful news in the fact that Nokia sold more Lumia phones (5.6 million) in Q1 2013 than it did in Q4 2012 (4.4 million) thanks to the new Windows Phone OS.
After the recent selloff in Nokia, it makes sense to stake out a position in this hardware player to benefit from any Windows Phone success in the years ahead. It’s a no sure thing, with almost 300 million NOK shares held short and a lot of ifs to figure out. But it could be a profitable trade for investors willing to take on some extra risk.
Stock to Sell: Samsung
If you haven’t noticed, Samsung (SSNLF) has been in a rut lately after its flagship Galaxy S4 failed to perform up to Wall Street forecasts. As a result, investors have fled Samsung stock, sucking out more than $25 billion in market capitalization from the Korean company as shares flopped 15% in just more than a month.
The complaints? Samsung hasn’t innovated enough to make the new incarnation any different or more valuable, harming the upgrade cycle that often results in fresh sales for hardware manufacturers.
But the bigger risk is that Samsung is looking to move away from Google and Android software to a new, open-source platform called Tizen. Experts say the new OS will be in place as soon as August. That might help prop up margins and keep Samsung as a frontrunner if it works … but beating Apple (AAPL) and Google in the software game is no small feat, and I wouldn’t bet against them.
Bigger-picture, JPMorgan and Morgan Stanley both cut sales forecasts and cut profit estimates on the company. So given the negativity and the risk right now, I’d steer clear of Samsung stock.
Stock to Buy: Apple
At around $400 or so, Apple stock is a decent buy right now. Its top competitor (Samsung) is struggling, analysts at Raymond James just upgraded the stock, and the blogosphere is buzzing about the potential of an “iPhone mini” to bring bigger volume to the smartphone giant even if it comes with smaller margins.
There are reasons to be skeptical, of course, after Apple’s fall from grace. Shares remain off about 35% from peak valuations last fall of more than $700 per share, and many are worried that the company isn’t innovating beyond dressing up its existing line of iPhones and iPads.
However, a $100 billion share buyback and dividend plan, a forward price-to-earnings ratio of less than 10 and a current dividend yield above 3% means Apple isn’t just standing still. And after several months of negativity, the bad sentiment seems baked in.
Stock to Sell: BlackBerry
Shares of BlackBerry have fallen dramatically from their January high, and I don’t see a comeback anytime soon.
The biggest reason for trouble at BBRY lately is BlackBerry earnings that included a surprise loss of $84 million on the quarter vs. an expected profit. Even worse than the minor loss was the major disappointment on Wall Street over gadget sales with only 2.7 million BlackBerry 10 devices shipped, sparking concerns that the Q10 and Z10 will not be the gamechangers many had hoped they would be.
BlackBerry was downgraded from “buy” to “hold” at Societe Generale on Monday after disappointing numbers. Analysts at Needham & Company and Deutsche Bank on also downgraded BlackBerry after the results. Targets around Wall Street continue to move lower, telling investors that the dip is expected to last.
BBRY believers point out that BlackBerry is trading for a fraction of book value. But BlackBerry stock hasn’t traded for par at any time in 2013, so why start now? Sentiment is clearly ugly, so investors should avoid this stock at all costs.
Stock to Buy: Google
While Google isn’t exactly a secret on the Street, soaring 25% year-to-date to flirt with $900 a share, there are reasons to expect the big run to continue.
Google is in the enviable position of low expectations on the hardware front; I’m not talking about goofy Google Glass, but instead the Nexus family of devices and the rumored “X Phone.” Even if GOOG falls a bit short, it’s not like investors have everything riding on one hardware launch.
But don’t think Google is a messy operation content with simply throwing things up to see if they work. Ever since 2011, when Larry Page took over as chief executive, a number of creative but money-losing efforts have fallen by the wayside. Google Reader is just one recent example of the cost-cutting victims.
At the same time, Google has gotten more aggressive about cross-marketing its products or using litigation to protect patents and fight back antitrust lawsuits. Some claim Google is going back on its motto “don’t be evil,” but I say it’s simply a $300 billion business acting like a $300 billion business. There’s nothing wrong with focusing on the bottom line, and subsequently, your investors.
One caveat: Just remember that Google doesn’t make much money on the OS yet and that overall smartphone operations aren’t a primary driver of revenue right now, so investors need to keep in mind that the underlying ad business still is what makes Google tick.
Stock to Sell: ARM Holdings
While ARM Holdings (ARMH) doesn’t actually produce gadgets, it is the brains behind many smartphone chips. But as a “fabless” semiconductor manufacturer, it doesn’t make anything — it simply outsources its designs to other smartphone outfits.
Being a middle man means high margins and big royalties when the chips are in its favor … but the risk of serious disruption should alternatives come around for gadget makers.
Right now, ARMH enjoys a brisk five-year growth rate of more than 30%, but sales are cooling to around 17% annually this fiscal year and next. And those projections might not hold now that semiconductor giant Intel (INTC) has seen real design wins with its Atom system-on-chip line for tablets, sparking a big rally. INTC has delivered roughly 20% year-to-date returns in 2013 vs. a slump in ARM stock that puts it in the red since Jan. 1.
ARMH stock soared twelve-fold from 2009 to its 2012 peak, exploding from under $4 a share to about $50 last fall. But now, as is so often the case, it becomes an expectations game and a question of competition. There seems to be too much success priced in and enough disruption risk to make ARMH a bad investment right now.
Oh, and with a measly 0.5% dividend yield, you don’t have incentive to stick around and wait. So dump ARM Holdings if you still own it.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aformentioned securities.