One of the most successful products in the Content on Demand MegaShift is the cell phone. Yet, since our sale of Nokia we have only had a very small exposure to this industry through UTStarcom (UTSI). That’s because although the numbers are great — 890 million phones sold in 2006, growing this year by 15% or so to over one billion phones — the business has turned into a hits or fad business, like movies or music. It’s very difficult to predict the next winner in a fashion business.

Yet, at the same time, the cell phone is absorbing function after function, making other stand-alone products obsolete, especially at the entry level. Phones may now have Palm-style organizer functions, high megapixel digital cameras (some with zoom), camcorders, MP-3 music players, GPS location systems, email connectivity and Internet browsing. Only the very highest-level phones have all those functions today, but the relentless drop in technology prices, thanks to Moore’s Law, insures that this high-end cell phone will cost half as much in two years, a quarter as much in four years, and only 12.5% as much in six years.

That’s great news for consumers, but bad news for a lot of Silicon Valley companies that have seen their product become a feature of a cell phone, and their customer change from a leading-edge, hip consumer to a Fortune 500 purchasing agent who negotiates costs out to four decimal places.

Leadership in the cell phone business see-saws between Nokia, Motorola (MOT) and Samsung, with occasional peeps out of Sony Ericsson. In the smaller market for email-connected phones, Palm and Research in Motion’s Blackberry have substantial market share. The imminent launch of the Apple iPhone on June 29 is creating a lot of buzz right now, and assuming it is not another flop like the Apple TV, it should get some market share, as well. (While Apple would seem like a great investment to take advantage of the demand for cell phones, we are not going to buy it until we know Senator Feinstein has negotiated a free pass for Steve Jobs’ option backdating at both Apple and Pixar. If he had to resign from Apple, the stock would be cut in half.)

But there is another company that I think will give us good exposure to the cell phone industry that I’m going to recommend today, and that is Motorola. After a wonderful run with its Razr phones during a time when Nokia seemed to be taking a nap, Motorola is now the odd man out. Why? The Razr is a bit long in the tooth, Nokia has some hot new products, and Samsung’s phones are just as good and cheaper. So, just as Wall Street beat Nokia down below $11 in August 2004, and the stock is now over $28, MOT was hit down to $17.32 at the end of April. I think the stock is sold out, which is to say the risk is low.

But what about the reward? Obviously, in the “hits” business cell phones have become, I can’t predict when MOT will have the hot hand and be Wall Street’s darling again. It could be as early as this fall, or it could take a year or two. Who knows?

But there is something else to drive this stock up. MOT has attracted the attention of several private equity funds — the folks who like to see companies declare large special dividends, sell non-core assets, cut costs and buy back stock. The private equity funds may ask for a board seat or two, or suggest that a company put itself up for sale, or even put together a buyout deal themselves and take a company private. All of these things result in a higher stock price, often a much higher stock price.

Who are these worthies? Carl Icahn, the cover boy on the new issue of Fortune, bought a 1.4% stake in Motorola in January and demanded a board seat. In a private meeting with Ed Zander, the ex-Sun Microsystems President and Chief Operating Officer who has been the CEO of Motorola since January 2004, Icahn said that he would drop the demand for a board seat if Motorola would do a $12 billion buyback. Zander said the equivalent of “we’ll see” and went back to Schaumburg, Illinois. MOT then announced a lousy March quarter, and although they did implement a $7.5 billion buyback, Icahn was mad enough to run for the MOT board. On May 9 he lost the fight, but got an amazing 45% of the vote. So the board is on notice that if the company doesn’t start doing better, fast, they will have to find a new CEO with a better strategy.

Icahn is not the only holder, though. Eddie Lampert bought Sears and only owns six stocks, one of which is MOT. Highfields Capital, Jana Partners, Pzena Investment Management and Third Point Capital, all well-known activist investors, have been buying the stock aggressively under $20. Highfields and Jana have partnered with Icahn before, and Penza recently forced Lear to seek a buyer.

I think something big is going to happen here. It could be a new line of phones that knocks Nokia off its pedestal. It could be a big restructuring with an accompanying special cash dividend. It could easily be a whopping $65 billion buyout at $28 a share. I’m not sure which, or when, but my guess is the restructuring and cash dividend in the next 12 months. One argument in favor of the buyout, though, is that after Zander left Sun Microsystems in June 2002, he was a Managing Director of a technology buyout firm, Silver Lake Partners, through December 2003. He has the connections to orchestrate a friendly buyout and keep his job.

MOT closed Friday at $17.89, and it is down a bit this morning. I think you could pay up to $19 for it. Going from $19 to $28 — my target price for January 2009 — is a 47% return in 18 months. Not bad, but we can do better. I want you to buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) up to $4 for a $10.50 target ($28 minus $17.50) in January 2009. That’s a 162.5% return, more than 3X what you would make on the common stock.

Why not buy the January 2010 LEAPs that are now available? First, I don’t think we need the extra year to have this work out. Second, only a $15 and a $20 strike price are available right now, and it is always awkward to get a position when the stock price is right between two strikes.

When you are buying these LEAPs, do not put in an order with a $4 limit, or even a market order. The Chicago Board Options Exchange floor traders are merciless, and they somehow have evaded the SEC’s drive to close bid-ask spreads to a penny. Instead, put in a limit order at or 10 cents under the ask price. The VMAAW closed on the bid at $3.10 on Friday, with a $3.20 ask, and at this writing is $3.00 bid, $3.10 asked with MOT down 20 cents. A fair price for the next few days would start from half the change in MOT stock on Monday added to or subtracted from Friday’s closing option price.