CNBC Business | Profit scenter

Profit scenter

Josephine Moulds tracks down the hot stocks to watch this month

Headlines screech of plummeting stocks on a daily basis; another week sees another blue-chip company go bust; policymakers scramble to avert a crash. The stock markets look like the last place to put your savings. In fact, now is the perfect time to start investing. 

The market may not have reached rock bottom. Signs suggest this slump will continue for some time, not least the fact that the UK is only just tipping into recession. But it shouldn’t matter for those investing on anything other than a short-term basis. Fidelity’s Tom Stevenson notes that five-year returns from the S&P 500 from May 1932 (the Great Depression), July 1982 (the worst recession in the last 25 years) and December 1994 (the most dramatic increase in US interest rates in 20 years) were 367%, 267% and 251% respectively. 

This recent collapse in confidence is an opportunity to seek out stocks that have been caught up in the market panic, but are strong enough to survive the rout.  

Nokia’s shares have crashed by almost 40% on the Helsinki stock exchange over the past six months. This seems overdone given the company’s complete dominance of the mobile handset market.  

Investors are concerned it will falter in the face of a consumer downturn. The market is fast maturing. Sales of replacement phones are far more important than sales to new customers. The worry is that cash-strapped consumers will be loath to replace handsets.  

Growth in sales volumes has slowed across the industry, from 21% in 2006 to an estimated 9%–10% this year. Nokia has followed suit with growth of 31% in 2006, slipping to an estimated 13% this year.  

The Finnish company recently announced that it would cede some market share in order to maintain profit margins, as rivals slash prices. Nokia also warned that margins in its core business of devices and services would fall below 20% in the third quarter. 

Investors were unimpressed and shares plunged. Their reaction seems excessive. Even below 20%, Nokia’s operating profit margin for phones could still beat rivals; margins at Samsung and LG were below 15% in the second quarter, while Sony Ericsson and Motorola are struggling to make profits. 

With 40% of the market, Nokia has a greater share than the next four firms put together. This offers massive economies of scale, and gives sales and marketing a boost. The Nokia brand is arguably up there with the likes of Coca-Cola and IBM.  

Any bad news, even from elsewhere in the industry, will likely rock the shares in the near term. But Nokia is well placed to benefit when markets stabilise. With so few pure handset makers around, it is best to compare the company instead to other big brand names. Trading on around nine to 10 times this year’s earnings, Nokia looks like a bargain next to IBM on around 13 times.  

It is not just consumer-facing companies that have been hit by the market panic. Mining stocks have crashed, losing around a third of their value in the past six months.  

Metals prices have collapsed (excluding gold, which is seen as a safe haven during financial crises). The industry argues that supply and demand dynamics remain favourable. The ongoing urbanisation and industrialisation of China and India offsets slower growth in the West, and guarantees demand for raw materials. However, new supply of commodities continues to be erratic. Speculators have fled the market, with the consequent impact on prices.  

In this environment, London-listed BHP Billiton is the most attractive investment opportunity because it is less sensitive to commodity prices. Around a third of its earnings come from coal, iron ore and manganese ore, which are priced by negotiation with customers. It recently achieved substantial price increases for these commodities that should hold into 2009.  

There has been a flurry of M&A activity in the sector. At the time of writing, BHP was waiting for the result of the European Commission’s review of its bid for Rio Tinto, expected in January. It is possible that Europe will force the sale of some of Rio’s iron ore assets, which may prompt BHP to walk away.  

In that case, BHP’s share price may rise. Even if the deal goes ahead, both firms look oversold and should offer good returns in the medium term.

auction diary

Impressionist and Modern Art 

New York, Christie’s 

6 November 

This sale includes masterpieces from some of the early to mid-20th century’s greatest painters. The flagship lot is Wassily Kandinsky’s  1910 Studie zu Improvisation 3, which has an estimate upwards of €10m and offers the Russian artist’s distinct view of modernism. Also on sale is Juan Gris’s 1915 Livre, Pipe et Verre, expected to sell for between €8m  and €12m. The sale also includes works by Matisse (pictured above), Picasso, and Cézanne and may prove to be the biggest of the year.

Important Watches 

Geneva, Sotheby’s 

16 November 

Sotheby’s biggest sale in November, there will be around 200 watches dating from the 17th century to the present day. The most sought-after will be a Patek Philippe Ref. 3448 (pictured) — it is an extremely rare model of which only 568 were made and this particular example is unique as it is the only one to have a leap year dial; it could fetch as much as €1.5m. The sale also includes numerous other timepieces from the world’s most desirable watchmakers, including Rolex, Breguet and Audemars Piguet.

19th-century paintings  and watercolours 

Vienna, Palais Dorotheum 

6 November 

Valuable manuscripts  and printed books 

London, Christie’s King Street 

12 November 

The Whisky Sale 

Edinburgh, Bonhams 

12 November 

20th-century British art 

London, Bonhams New Bond Street 

19 November 