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Nokia shareholders should move forward with caution

Sun., June 26, 2011, midnight

Just over a decade ago, the Finnish mobile-phone maker Nokia (NYSE: NOK) was the darling of the technology sector, but the stock has fallen from a peak of $56 to roughly $7. The outlook got worse recently, when Nokia significantly lowered its sales and profit expectations.

The company is refocusing its strategy on smartphones, but it’s late to the party. New Nokia smartphones may debut at the end of the year, more than four years after the first iPhone. Nokia is still the world’s largest seller of mobile phones, but it dominates the less profitable segment of phones meant mainly just for talking.

Nokia was a successful pioneer because those old phones were what it was best at. It was a telecommunications company, expert in electronics, radio reception and signal processing. Software was somewhat secondary. But today’s phones aren’t phones – they’re versatile computers that offer telecommunications, too.

Dropping its Symbian software was a good move for Nokia, but instead of adopting the obvious Android platform, Nokia opted for Microsoft’s. (Nokia’s new CEO was previously a Microsoft executive.) One has-been jumping into bed with another is rarely a sound technological plan, and though Microsoft may have many years of profitable business ahead of it from its legacy PC market, when it comes to new stuff like phones and MP3 players, it’s been disappointing.

Be wary, Nokia shareholders.

Ask the Fool

Q: What’s a hostile takeover? – B.L., Opelika, Ala.

A: A typical takeover is friendly, with one company agreeing to be bought by another. Managers from each firm will meet with each other and freely share information about themselves.

In a hostile takeover, though, the acquisition target is not too thrilled or cooperative. A hostile takeover happens when a would-be acquirer sees some strategic value in another company. It may make friendly overtures and be rebuffed. If so, it may then move on to dealing directly with the target’s shareholders, offering to buy their shares from them for either a certain amount in cash or an exchange of stock. If enough shareholders respond, the acquirer can gain control.

In order to entice shareholders, the offer will generally be for a price significantly higher than the target’s current stock price. (Companies whose share prices have slumped are extra-vulnerable to takeovers.)

Some high-profile hostile takeover bids have included IBM for Lotus, Johnson & Johnson for Cordis, AT&T for NCR, WorldCom for MCI, Alcoa for Reynolds Metals, Norfolk & Southern for Conrail, and Hilton for ITT.

Q: In its last quarterly earnings report, Dell beat earnings expectations but missed its revenue expectations. Shouldn’t those two numbers move in lockstep? – N.P., Tampa, Fla.

A: Not at all. Revenue is the top line and earnings the bottom, and in between there are many factors. If a company’s revenue holds steady over a few years, but it adds many employees or beefs up its advertising, its expenses will rise and its earnings, or profits, will shrink. When you see a company’s earnings growing faster than its revenue, that suggests that it’s becoming more efficient and its profit margin is increasing.

My dumbest investment

I bought a pump-and-dump penny stock at the highest pump – just when it had risen the most on undeserved hype. It took about a week to go from $4.79 per share to $0.08. It was my first experience with a penny stock, and my broker never said a word to me about what I was getting into. He was a full-service broker, too. I hung in there and still am hanging. The company must have been listed on the “pink sheets” at the time, where shakier and less established companies tend to reside, but my broker, knowing I was very new to investing, never warned me about that. – S.A.B., Indianapolis

The Fool responds:

Seems like you received only half-service, if that. New investors shouldn’t be shy about asking lots of questions – of their brokers and others. Don’t think you have to hang onto the shares, though. If you lost a lot, you might want to close out the position and recognize a taxable loss. And then invest whatever’s left in a more promising stock.

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