Nokia (NYSE:NOK) stock did not escape the whipsaw from the insane year we’ve had. When the novel coronavirus pandemic caused the shut down, NOK stock collapsed almost 50% in just a few weeks. Then it recovered all of these losses and then some almost as fast. Needless to say it moves quickly and for long stretches at a time. Speed causes problems because traders have little room for error. It’s hard to jump on or off a merry-go-round if it is moving fast.
The pandemic crash surprised us all. But savvy investors used tools to avoid the obvious mistakes. Late in January, stocks were rallying out of control, even though we had warnings from China. It made no sense to make new highs when second-largest economy had completely closed. I warned about staying long Nokia stock after a strong rally it had back then. It had just rallied 25% on a bounce from the disastrous reaction to the October 2019 earnings report. Even though I didn’t catch the top exactly, I would have saved investors a lot of losses and heartache.
Winning in the stock market starts by not making unforced errors. The fear of missing out (FOMO) is very dangerous. It is innate to everyone and pushes us to chase trends. Those who do it late suffer consequences in their portfolios. Investors need to learn a skill to help them resist the FOMO. It is crucial for us to have the ability to leave profits on the table. Another thing that is essential is the guts to book a loss before it balloons. This is especially critical with a fast mover like this.
The Opportunity in Nokia Stock Starts in 2021
We’ve all been waiting for 5G for what seems like an eternity. Finally, all the handset makers and service providers are ready for it.
T-Mobile’s (NASDAQ:TMUS) latest earnings report showed that the industry is healthy. This should help Nokia come out of its doldrums. It may take months, but it has fallen far enough that it’s worth a shot. The Covid-19 crash test should stand as a cement floor. I doubt that there will be a lower-low soon. This is a base from which the bulls can engineer a comeback.
The fundamentals are not likely to be a source of worry. It has a trailing 12-month price-earnings-ratio of 21x. Looking forward, the P/E drops to 14x, so it’s not rich. The price-to-sales is under one, which is an indication that investors have realistic expectations. There is not a lot of hope built into the current stock price. Perhaps the reason for this is the fact that there’s also no growth on the income statement. We can find points of entry and exits with confidence on Nokia’s stock chart.
From the 12 months trend I surmise that it likely has more upside. Perhaps it can fill the gap from the earnings debacle. Expanding the view we quickly realize that Nokia stock has been in a hideous downward spiral from its highs. It’s depressing to see it come down from $62 a share to this. I propose that the channel range still allows for this swing trade higher within it.
It is important to note that this is a trade not an investment. I can’t bet on a long-term recovery effort yet. The bears have had their claws into it for years. It’s up to Nokia’s management to prove that they deserve the benefit of the doubt now. So far, there’s no evidence of that; therefore, it is important to know when to get out.
Better Be Safe Than Sorry
A drop below $3.20 would signal a much lower target that could even breach the March lows. Conversely, if a rally materializes here, NOK will face resistance near $4 per share. Since we defined the opportunity as a trade, it is important to book some profits there. If the bulls can break through the resistance band, they can reach for $5 or higher.
The macroeconomic conditions have not improved much and this has to work within it. The globe is still wrapped up in a hideous virus situation. Going into the colder months, infection rates are expanding and we still await a vaccine. Until then, Nokia’s business will continue to face headwinds.
This is all to say that expectations should be realistic. Knowing when to book a loss early is extremely important. I wouldn’t mind sitting on losses in company like Amazon (NASDAQ:AMZN) or Apple (NASDAQ:AAPL). I don’t do it inside a descending channel like this one. Nokia stock is cheap on its face value because it’s under $4. That doesn’t mean it can’t lose you 100% of your money. Don’t let the low sticker price fool you into taking oversized volatile speculative risk.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
