Q2 2013 – Dog days.

It looks very much like the time has come to look to the recovery stories.

• Despite the panic, I have real doubts whether Samsung’s earnings miss is any more than a symptom of a slowing market.
• Samsung’s preliminary earnings point strongly towards a miss from smartphones.
• The signs of a slowdown have been there for some time but Q2 EBIT at KRW9.5tn compared to expectations of KRW10.0tn points to a greater slowdown than expected.
• There are no more details at present but it is clear that the main culprit was the handset business.
• The competitive environment has not meaningfully changed and as a result I suspect that this is simply a case of market saturation.
• The desirability and aspirations for a smartphone has driven users to pay up for higher specified devices for the first time.
• This has been going on for a long time but because it has caused an aberration in terms of the handset market, it has been very unpredictable.
• This has made it impossible to tell when demand for high end smartphones would really slow down.
• With both Samsung and Apple now on the ropes, it looks very much as if that time has come at last.
• Analysts (myself included) love straight lines which means when things begin to slow, estimates need to be cut several times before the right level is found.
• Hence, I expect that forecasts for both Apple and Samsung will need to be trimmed further for a couple of quarters to come.
• This means that one needs to look elsewhere for earnings expansion and upgrades.
• This leads me straight to the recovery stories of Nokia, Yahoo!, Microsoft and BlackBerry.
• The smartphone world is ripe for the emergence of a third ecosystem and frankly I think there is space for a fourth, fifth and even sixth.
• Microsoft leads the pack of contenders to be the third ecosystem as it offers a good user experience and has a complete offering of Digital Life services.
• Although Microsoft will be a beneficiary, Nokia is far more geared to success and as a result is where investors should look to play the third ecosystem.
• Next up is Yahoo! which has a good offering when it comes to Digital Life but needs to integrate that into something cohesive as well as migrate its usage into mobile.
• At the bottom of the list is BlackBerry.
• BlackBerry has bet the company on BBM which it is making available on iOS and Android.
• This is likely to result in emerging market users no longer buying BlackBerry devices meaning that next quarter’s BB7 shipments miss forecasts meaningfully.
• That will be enough to send the stock down again and so it is much too early to consider buying back in.
• Hence my top recovery stories are Yahoo!, Nokia and Microsoft.
• These are the positions I would be looking to hold for H2 2013.