Over the past few months, I have been buying small positions in Nokia (NYSE: NOK) and Pearson (NYSE: PSO). Both reflect a type of company which has become particularly interesting to me: transition companies. By this I mean companies who are in the process of transitioning from a lower multiple business model to a market that is valued at higher multiples. This started with my interest in Walmart two years ago when I believed the potential for Walmart increasing their online sales presence meant they deserved a greater valuation.
In the case of Nokia, many know the company as the old cell phone manufacturer but they have been making significant moves into 5G. This is a known fact however, what I am betting on is the fact that they can successfully transition their whole company to focus on 5G and become a dominant player in the space. Currently, they are valued significantly cheaper than many comparable 5G companies.
For Pearson, they are transitioning from a textbook publisher to an online education company. Publisher’s such as Pearson are valued cheaply due to a declining end market, and if the company is successful in transition to an online education platform (that may supplement textbooks), Pearson’s value will significantly increase.
For both cases, the difficulty comes in being able to quantify a difference in opinion compared to the market. As in how much better do I expect Nokia/Pearson to transition compared to the market, and how should that be reflected in the value of the stock. I’m still refining my how to take my though process and apply it to valuation techniques that aren’t overly simple or too complicated.
