Smart Investing


August 3, 2012


Think twice about trusting 'alternative investments'

Many people are afraid of investing in stocks, on the basis that the risk is too high, or because this or that is going to happen.

The investment community, known as professional brokers or advisers, now places clients' money into what is known as "alternative investments," which is a fancy way to make money for Wall Street but doesn't really do anything new.

Rather than trying to educate investors on traditional investments like stocks, bonds and cash, it is easier to say bad things about those investments and put your money into these "safe alternative investments." Look up the term in Wikipedia and you will discover that alternative investments include tangible assets like art, wine, antiques, coins or stamps, and financial assets such as commodities, private equity, hedge funds, venture capital, film production and financial derivatives.

Many of these — if not all — are riskier than stocks, but since investors can't see the daily movements in the stock price, brokers pitch the idea that these are "safer."

Let me give you a quick example before I discuss the fundamentals on Nokia. In the first six months of 2012, the S&P 500 was up 9.49 percent after all the ups and downs were over. Compare that with the biggest hedge funds, compliments of Barron's, and you will discover that this form of alternative investment — the best hedge fund out of this group for the first six months of the year — earned 9.6 percent, beating the S&P 500 index by 0.10 percent. The three-year cumulative return was 18.4 percent. Compare that to the three-year cumulative return of the S&P 500 of 57.7 percent. Which would you prefer? Yes, I did look at the worst-performing big hedge fund, and had you been in this hedge fund for the first six months of 2012, you would have seen your portfolio drop by 4.1 percent.

Investing in public companies with strong fundamentals and ignoring the daily fluctuations of the stock market makes the most sense if one understands what they are investing in, or finds an adviser who understands what is going on. So when your broker calls with this great investment idea about an alternative investment, tell them, "No, thank you, I really don't want to be in a non-liquid investment."

I received a request from Pat about Nokia. Since I haven't looked at it in a while and I've had some good gains on it in the past, I thought it would be a good company to look at again.

If you're not familiar with Nokia (NYSE: NOK), it is a telecommunication company providing hardware, software and services worldwide. The company is based in Espoo, Finland, and its currency is the euro. The 52-week high-low for the stock is $7.38/$1.63. However, the stock did trade as high as $39 back in October 2007, and surpassed the $56 level in April 2000.

While it may look tempting to buy this stock now as a great value, an investor must look deeper into the company.

With a stock this low, the first place an investor should look at is the balance sheet to make sure there is equity in the company. Nokia has equity value of 9 billion euros; 12 months ago it had an equity value of 12.3 billion euros. The big decline in equity mostly is due to a 1.2 billion euro decline in accounts receivable and another 1.4 billion euro decline in goodwill and intangible assets. Nokia over the past year has done a good job of holding on to cash; currently the company has 9.4 billion euros — roughly the same as one year ago.

Cash flow for the first six months of the year was a negative 488 million euros, mostly due to the net loss of 2.4 billion euros. I noticed a slight reduction in capital expenditures from 270 million euros one year ago to the current 247 million euros.

Nokia, as of June 30, 2012, had total debt of 5.2 billion euros, down from one year ago at 5.5 billion euros. From the cash flow statement, there was a surprising debt reduction of 192 million euros. I say it's surprising because when a company is losing money it is rare to pay down debt as opposed to conserving its cash. A bad sign in the debt on the balance sheet was that 25 percent is in short-term debt, which could be at risk of higher rates down the road, costing the company more in higher interest payments. The total debt-to-equity is currently 58 percent, and the current ratio is 1.31 — not too bad, but not too good either.

The mean of 25 analysts see the company losing 39 cents per share for the year ending December 2012 and another 5 cents per share in 2013. Ninety days ago the mean estimate was for a profit of 11 cents per share for the year ending December 2013.

If you are considering investing in Nokia or continuing to hold it, you must read more about its plans for the future from its quarterly and annual SEC filings, known as the 10-Q and 10-K, respectively. If you haven't, I would also suggest reading or listening to the company's last two conference calls to hear what the executives are saying. Be careful — this company could be in a slow death spiral with all the cash it has on its balance sheet, giving you nothing more than a dead investment for years to come. Or, it could be a high gainer — know what you're investing in.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


August 3, 2012