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From Shingles To A Home Run

Nokia (NOK) is packing a wallop: Its stock keeps on climbing in spite of market woes. The world's leading mobile-phone maker has sprinted from 18 a year ago to 33.67 on Sept. 12, buoyed by strong sales and earnings and new products, including music phones. "The relatively modest price-earnings ratio and the stock being 50% below its all-time high of 62.50 show that Nokia remains undervalued," says Bernie Schaeffer, chairman of Schaeffer's Investment Research, which owns shares. He also thinks the big short-seller interest in the stock is a plus. The options traders have been "heavily playing the put [sell] side lately despite the strong price action of the stock," he notes.

The bears are fighting the upward trend in the options market, and this is placing a very high put/call ratio on such a strong-performing stock, adds Schaeffer. The ratio between open puts and calls is almost even, "which is highly unusual," he says. Ordinarily, the calls significantly outnumber the puts in a stock that's sharply rising, he explains. Schaeffer figures that when this negative bet unwinds, as Nokia's stock continues to rise, it will add to the stock's upward momentum. Schaeffer sees the stock at 50 in a year or so. The big stakeholders in the Finnish company are U.S. institutions, led by Capital Research Management, which owns 4.5%, and Fidelity, with 4%.

Worldwide demand for handsets remains robust, analysts say. "Nokia is expected to maintain or even surpass its 37% market share in the next few quarters," says David Wong, an analyst at A.G. Edwards (AGE), who rates the stock a buy. On Aug. 29, Nokia rolled out new high-end phone models and new game and music services. As the company expands its high-end product lines, says Wong, it will improve selling prices as well as the profitability of its phone business. The new phones provide access to the Internet and are set up for games, music, photos, and maps.

Mark McKechnie, an analyst at American Technology Research, views as positive Nokia's expanded efforts to provide such services. "It will enable Nokia to offer experiences rather than just devices" with its handsets, says McKechnie. He thinks it is an important move on the part of Nokia as mobile services migrate from voice-centric to Internet-centric. He figures the company will earn $1.75 a share on sales of $67.7 billion in 2007 and $1.95 on $76 billion in 2008. In 2006, Nokia earned $1.26 on $51.6 billion. McKechnie rates Nokia a buy.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Rail stocks have slowed since their speedup earlier in the year. Reduced freight traffic and the market's slump pulled them lower. Enter the railroad bulls, who have snapped up more shares. One of them is Ed Wachenheim, president of Greenhaven Associates, who favors Union Pacific (UNP), parent of Union Pacific Railroad, the largest U.S. railroad in both track miles and revenues, whose stock slid from 127 in June to 108.69 on Sept. 12. Improvements in UNP's fundamentals have made it even more attractive, argues Wachenheim. In particular, UNP is benefiting from increased imports, including grain, from China and other emerging countries. And railroads have gained an edge over truckers, he says, because of rising fuel costs and congestion on the highways, which jack up the trucks' operating costs. The high price of oil, says Wachenheim, has also led to increased demand for coal and ethanol, both of which are largely shipped by rail. He values UNP at 165 based on estimated earnings of $7.48 a share in 2007, $9.23 in 2008, and $10.78 in 2009.

UNP, which covers 23 Western states with 33,000 route miles, is one of Morgan Stanley's (MS) top rail picks. In a report, Morgan says UNP has "the most potential earnings upside from pricing and productivity." Investors should do well owning railroads in general over the next 18 months, says William Greene, an analyst at Morgan Stanley (MS). Apart from Union Pacific, he also favors Norfolk Southern (NSC). He says rail valuations are very attractive at their current levels. Another prominent rail bull is Warren Buffett. Berkshire Hathaway (BRK), of which Buffett is chairman and CEO, is a big stakeholder in UNP but its actual holding isn't yet public because Berkshire has asked for confidential treatment regarding the number of shares it holds. On Aug. 30, Berkshire filed that it owns 14.99% of Burlington Northern Santa Fe (BNI).

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

The agony felt by NeurogesX (NGSX) investors has started to lift. Its stock, which sagged from 11 in May to 6.60 in August, has rallied to 9.08 on Sept. 12. NeurogesX is a biopharmaceutical developing novel pain therapies. Its chief product, NGX-4010, a skin patch containing synthetic capsaicin, is in phase III trials for treating patients with post-therpetic neuralgia, a side effect of shingles. On Sept. 4, the stock jumped to 8.25 after the company reported positive results from its second study of NGX-4010. It showed a 32% reduction in pain from a single, 60-minute application of the patch, according to NeurogesX. The patch also yielded favorable results when tested in a phase III trial for HIV-related distal sensory polyneuropathy (DSP), characterized by pain in the feet and hands. With over 1,500 patients in the neuralgia and HIV-distal sensory polyneuropathy clinical studies, "we are building a significant body of evidence" to support a potential new drug application filing in the second half of 2008, says CEO Anthony DiTonno. He says the company is on track to complete the filing of an application later this year for approval to market the product in Europe. In the U.S., it expects to submit a new-drug application with the Food & Drug Administration in the second half of 2008, both for neuralgia and HIV-distal.

With the two positive clinical studies results, "NGSX can cement a European partnership and achieve registration of the drug in Europe and the U.S.," says Gregory Wade of Pacific Growth Equities, which has done banking for NeurogesX. He rates the stock a buy. He expects NeurogesX to enter into a regional or global co-development and commercialization partnership by the first quarter of 2008.

Angela Larson of Susquehanna Financial Group says NeurogesX is undervalued assuming a launch in Europe in 2009 and in the U.S. in 2010, with possible sales of $240 million by 2012. Given the wealth of product information and the probability of the drug's success, Larson rates the stock positive.

Megan Murphy of Lazard Capital Markets, who also rates NeurogesX a buy, says a survey she conducted among physicians indicated strong interest in NGX-4010. Lazard has done banking for the company. In the survey, she says 95% of physicians indicated that they would prescribe the drug for post-therpetic neuralgia, and 90% indicated they would prescribe it for "painful diabetic neuropathy," by far the biggest market.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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