A Quick Look At Some Smartphone Has-Beens

Although Moody's and Standard & Poor's ratings services have kept ratings on Nokia's (NOK) debt just above junk-grade (Moody, S&P), Fitch stepped up to the plate with a new debt rating of BBB- for Nokia's obligations. Nokia defended its creditworthiness by displaying its multibillion-dollar war chest, but honestly: the last two >$1B bond issues can't be repeated, and the company is hemorrhaging while trying to build iPhone-competitors for Microsoft. Nokia managed to lose $1.2B last quarter while Microsoft is paying the firm to build smartphones. Meanwhile, its non-smartphone business isn't keeping it afloat.

This is mostly interesting not because Nokia was a paragon of innovation, but because I recently singled it out as a top smartphone loser one should consider as the short leg of a proposed long/short favoring Apple.

For those of you following the long/short +AAPL/-RIMM I disclosed in my first article on it, my RIMM short was closed when short puts were exercised at the last expiration. The math:
$14.30 Short Sale 2/29 RIMM
$ 0.65 Short Sale 3/1 of March puts @14 (expired worthless)
$ 1.10 Short Sale 3/19 of April puts @14 (exercised)
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$16.15 Gross Proceeds
($14.00) Cost to close short 4/23
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$ 2.15 Profit (2/29-4/23)

I honestly don't know whether the convention is to use the purchase (close) price to calculate yield (~15.4%), or to use the price at which the position was opened (~15%), but in either case this isn't bad from 2/29 to 4/23. Rounding the time in the position up to two months, this annualizes to a rate of return exceeding 100% (it'd be over 130% if there were no transactions costs, but small differences grow with compounding). For a high-confidence position, this isn't too bad. I had actually expected the company to drift sideways longer than it did, but the current price of $13.46 would not have put me in as much profit as if I'd enjoyed the additional revenues from the put options. If it pops, I may return. I'll have to have a look at it.

I still have the long leg of the trade: AAPL at $543, in a share count matched to the size of the RIMM investment. At today's ~$610, this is about $67 a share up, or 12.3% (annualized rate would be 100%). The truth is that I won't sell this any time soon. On the recent pullback below $560, I bought some AAPL with the funds I injected into my retirement accounts over tax season, and those shares I may sell as they pop in order to rotate them into something that would be more painful to own in a non-tax-deferred account.

If I thought holding AAPL was a bad risk, I wouldn't own it without the short leg – but this is a stock whose risks I'll accept. And whose profits.