Nokia’s share-price jump reveals short sellers, analysts’ errors

September 3, 2013 05:54 AM

Nokia Oyj’s 48% rally today spells bad news for hedge funds and analysts that bet against the Finnish mobile-phone maker.

Nokia had the biggest percentage of its shares out on loan -- 11.84% -- through Aug. 30 among Stoxx Europe 600 Index companies with a market value of more than 10 billion euros ($13 billion), according to Markit data on Bloomberg. Shares on loan indicates how much short-selling activity has taken place. The company was analysts’ 17th least liked stock from Europe’s 190 biggest listed businesses, Bloomberg data show.

Short sellers and analysts who failed to account for a takeover saw their bets implode today when Nokia posted its biggest rally since at least 1991 on Microsoft Corp.’s agreement to buy the company’s mobile-phone business and patents for 5.44 billion euros. Once Europe’s biggest company, Nokia’s market value had fallen to as little as 11 billion euros from more than 300 billion euros in 2000 as the company lost market share to Apple Inc.’s iPhone and devices running Google Inc.’s Android.

“It’s caught everyone by surprise, no doubt about that,” Mika Heikkinen, who helps oversee about 2 billion euros at FIM Asset Management Ltd. in Helsinki, said by phone today. He holds more shares of Nokia in his funds than are reflected in benchmarks. “The main driver behind short-sellers was that the Windows phone would not be profitable. And I always thought that there was a future in the Windows phone.”

Shares in Espoo, Finland-based Nokia surged as much as 48% to 4.40 euros today.

Hedge Funds

Almost 12% of Nokia’s shares outstanding were on loan on Aug. 30, down from a high of 20.6% in March, Markit’s data show. That compares with an average so-called short interest of 1.3% in Europe’s largest companies, according to data compiled by Bloomberg.

According to Bloomberg data based on regulatory filings, Discovery Capital Management LLC reported on July 22 a short position in Nokia. The phone maker’s shares fell 1.9% from then through yesterday.

Blue Ridge Capital LLC reported a bet against Nokia’s shares on July 25. The stock declined 3.1% between then and yesterday.

Viking Global Investors LP on Aug. 8 said it had bet that Nokia shares would drop, the data show. The handset maker slid 4.1% between that date and yesterday. Rose Shabet, the chief operating officer of Viking Global, said the company doesn’t comment on individual positions.

Spokesmen for Blue Ridge Capital and Discovery Capital declined to comment. Lone Pine Capital LLC, Maverick Capital Ltd. and Brookside Capital Management have also reported short positions in Nokia since June. Lone Pine declined to comment. Spokespeople for Maverick Capital and Brookside Capital didn’t return phone calls seeking comment.

Analysts Consensus

The Finnish company yesterday had an analyst consensus rating of 2.84 on a Bloomberg scale that goes from 1 for the most sell recommendations to 5 for the most buys. By today, the rating had climbed to 3.04.

“This transaction comes as a surprise to us,” wrote analysts at Sanford C. Bernstein & Co. led by Pierre Ferragu in London in a report. They raised their recommendation to market perform, or hold, from underperform, or sell.

“Our short thesis on Nokia has always been grounded on the assumption that nobody would dare to buy out a business of that size and in such a difficult position,” the analysts wrote. “We recognize today we underestimated this upside risk.” Bernstein had an underperform rating on the shares since June 2011 and a share-price estimate of 1.50 euros. The brokerage has set a new forecast of 3.60 euros.

Price Targets

Kai Korschelt, an analyst at Deutsche Bank AG who had a sell recommendation on Nokia for the past year, today raised the brokerage’s recommendation to hold, while leaving its price estimate at 2.20 euros. Credit Suisse Group AG increased its recommendation to neutral from underperform, and lifted its price forecast to 4.80 euros from 2.25 euros.

Nokia plunged 98% between its highest price in 2000 and its subsequent low in 2012 as the company reported slumping phone sales and shrinking margins. The retreat forced Nokia to leave the Euro Stoxx 50 Index in March this year. The company had been a member of the benchmark gauge since the index’s inception in February 1998.

As part of today’s announcement, Nokia’s devices and services unit, which accounted for more than half of the company’s 2012 revenue, along with 32,000 employees, will transfer to Microsoft. Nokia Chief Executive Officer Stephen Elop, 49, will return to Microsoft after a three-year stint running the Finnish manufacturer.

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