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Surviving In An Apple And Google World

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Preston Waters

If you’re a current Nokia (NOK) investor or one of the 10,000 workers now looking for work after Nokia’s latest layoff announcement, you’re probably ready to smash the first Apple (AAPL) iPhone or Google (GOOG) Android phone you see.

Based on my experience with gap-downs following press releases similar to Nokia’s, the odds favor Friday or Monday marking the short-term low. Even with all the money Microsoft (MSFT) has put into Nokia, it appears to be too little too late.

Bargain hunters and short sellers covering positions could push the price up about 50% in relation to the gap-down price. Looking at the chart, I expect short-term resistance near $2.60. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $2.40-2.50 a share today, but also be prepared for a closing under the open of $2.44, and more than a 30% chance of a close under $2.20.

If you are looking for today’s drop to signal a buying opportunity, you are likely going to find the end of the day Friday better than today. There is no hurry jumping on board with Nokia.

Stocks dumping as a result of earnings misses usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $2.50 as the one that “sticks.” (Read my article Will Apple’s Shot at Google Hit RIM and Nokia Instead?)

Want to see a classic miss earnings result a few weeks after the fact? Take a look at Pandora (P). Pandora disappointed and traded from $14 down to an intraday low under $8. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Pandora is now resistance.

A more recent earnings gap down is DELL (DELL). Dell disappointed and traded from $15 down to an intraday low of $12.31. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance.

Pandora also took more than two months in recovery to reach the gap down price. Pandora, like Dell, will take about six months to trade again at pre-gap pricing, if the next two reports are favorably received by investors. I love listening to Pandora; but I am not ready to invest just yet.

We know why Nokia and Research In Motion (RIMM) have lost their connections. Apple’s iPhone and Google’s Android platform are crushing other smart phone makers like a winery crushing ripe grapes during harvest. After Apple produced one of the greatest earnings beat in the history of tech, it doesn’t take a leap of understanding to figure out someone was going to end up short. (Read my RIM’s valuation calculation article)

Although RIM doesn’t have the backing of Microsoft, RIM does have growing sales in Asia and a service revenue stream to provide a crutch during weak hardware sales. Look for Microsoft to find other partners.

When Microsoft isn’t relying so heavily on its Nokia partnership, things may really turn for the worse in Finland. Google’s Android phones are the most popular in the world and there is no sign of the fight between Apple and Google letting off soon. RIM and Nokia will continue to get squeezed like small fleas caught between sweaty Sumo wrestlers fighting, unless they can break the vicious circle.

Last quarter Apple’s revenue was just short of $40 billion, an increase of 59% over the same period last year. The biggest product is the iPhone, however, Apple is firing on all cylinders. The Lumina may be a hit product, but if production can’t meet demand and the demand consists of only AT&T (T), Nokia is demonstrating a lack of leadership ability in the space. With Apple as a competitor, they have lots of company.

Nokia needs to follow up with another hit phone and expand beyond AT&T if they hope to maintain critical mass of users needed to keep app developers interested. Of course if Microsoft finds other makers able to compete with Apple on the windows platform, it may help Nokia buy some time.

What’s the best play with Nokia? There should be a very attractive trade coming up Friday and or Monday. Near the end of the day, if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom. It’s not one to get greedy with. Hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits.

Otherwise, for longer-term investors the best play is to wait until we are closer to the next earnings release for an entry.

The Street

Preston Waters

Preston Waters

Editor

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