Nokia (NOK) — our top conservative idea for 2022 — has struggled for years to remain competitive in its core market of selling equipment to telecom network operators, suggests Bruce Kaser, editor of Cabot Turnaround Letter.

Its early choice of using field programmable chips, as opposed to factory programmed chips, set back its 5G efforts by years. The result: weak revenues, thin margins, a bloated and misdirected expense base, and a leveraged balance sheet.

However, the arrival of new CEO Pekka Lundmark (March 2020) has brought the company back into the game. His strategy to invest heavily in research and development has restored Nokia’s technology competitiveness, which has helped the company return to positive revenue growth.

Better products and better spending control have boosted profit margins to 11%, attaining Lundmark’s targeted range of 10-13%. Nokia is generating sizable free cash flow and now has €4.3 billion more cash than debt. Lundmark is eliminating bad business practices like its selling of its receivables — a low-quality and expensive way to generate cash flow.

We anticipate that Nokia will restore its dividend and announce a share buyback program in 2022. Despite its progress and the likely continued ramp-up of 5G spending, investors continue to give Nokia little credit.

Subscribe to Cabot Turnaround Letter here…

A Look Back at 2021's Top Performers

Bruce Kaser picked two excellent performers last year, including one that gained over 200%. Here, he offers updates on his Top Picks for 2021.

We first recommended Signet Jewelers Ltd. (SIG) in September 2019. Under Gina Drosos — who became CEO in August 2017 — the company not only adeptly navigated the pandemic, it has also moved into the vanguard of jewelry merchandising, retailing and e-commerce. The credit issues were fully resolved, the balance sheet is now “fortress-like” and Signet is generating strong free cash flow.

The stock — which we chose as our Top Pick for 2021 — gained 211% last year. We moved the shares to a Sell in early November of 2021 at just over $104 as the risk/return trade-off became unfavorable, for a 505% total return since the position’s inception.

If its fundamental strength continues, Signet could see its shares continue to surge. With its $4.6 billion market value and strong balance sheet, a private equity company could easily acquire Signet, likely at a high premium. As such, we suggested that shareholders consider keeping a stub position that could participate in any further price gains.

Wells Fargo & Company (WFC) — our conservative Top Pick for 2021 — rose 63% last year. In mid-2020, when we initially recommended WFC shares, investors were worried about potentially sharply higher credit losses due to the pandemic-driven economic shutdown. We were encouraged by the efforts of new CEO Charles Scharf to aggressively restructure the bank’s operations.

Through 2021, the bank’s credit losses remained remarkably low while CEO Scharf continued to execute on his turnaround strategy. Like all banks, Wells is struggling with low interest rates and limited loan growth as well as the regulator-imposed cap on its asset size. But the better financial results led to rising confidence in the bank’s future, driving the shares higher for the year.