Top Ten Optical StocksTop Ten Optical Stocks

We pick those companies that we feel are best positioned for recovery from the current market doldrums

August 13, 2001

6 Min Read
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Looking back on the performance of optical stocks during the last six months is a task best performed under the influence of medication – say, Zoloft, Prozac, or another antidepressant.

It hasn’t been a pretty year. Admittedly, our last picks are in the dumps. Our only defense is that the entire sector is in the dumps. Yeah, things really sucked for optical stocks during the first half of this year.
Table 1: Old Top Ten Optical Stocks

Old Top Ten Company (1/12/01)

Price 1/12/01

Price 7/12/01

% Change

Avanex

52.63

7.64

-85.48

OCPI

12.83

10.2

-20.37

Xilinx

50

40.62

-18.75

New Focus

34.44

7

-79.67

Ciena

88.88

35.62

-59.92

Sorrento Networks

17.81

8.18

-54.03

Sycamore Networks

44.94

7.87

-82.48

JDSU

50.19

12.03

-76.03

Solectron

37.9

16.4

-56.72

Juniper

131.5

28.47

-78.35

Average Portfolio (Price-weighted)

-61.25%

Light Reading Index

-60.99%

Nasdaq Composite

-20.97



But crisis creates opportunity. So it’s time for an update – and an adjustment to the list. In fact, it’s a total overhaul. We don’t like our previous picks. In fact, we hate them. They really sucked. What were we thinking? The only ones we’re keeping: Ciena and Juniper.

Here’s the new list:

Table 2: New Top Ten Optical Stocks

COMPANY

PRICE 8/8/01

1.Corning Inc. (NYSE: GLW)

15.85

2.Digital Lightwave Inc. (Nasdaq: DIGL)

17.3

3. Juniper Networks Inc. (Nasdaq: JNPR)

23.47

4. Sonus Networks Inc. (Nasdaq: SONS)

22

5. EXFO (Nasdaq: EXFO)

14.2

6. Ciena (Nasdaq: CIEN)

30.88

7. Riverstone Networks (Nasdaq: RSTN)

14.84

8. ONI Systems Inc. (Nasdaq: ONIS)

21.65

9. Extreme Networks (Nasdaq: EXTR)

27.3

10. Qwest (NYSE: Q)

24.2



How'd we come up with it? First, we had Light Reading's staff of editors vote on their top public companies. We used those votes to compile a list of nominees. Then we screened the nominees further, taking a closer look at the recent financials and going over our own analysis of technology positioning. Chris Bulkey, research analyst at our subscription research service, Optical Oracle, combed through the company financials and had already identified market leaders in the Optical Oracle newsletter . For example, Qwest was ranked as the number one carrier in our June Optical Oracle newsletter, the "New Carrier Landscape." And three of our components and testing picks -- Corning, Digital Lightwave, and EXFO, came out on top in a ranking of 10 public components companies in the current Optical Oracle, released on Thursday (back issues of the newsletters are available to subscribers at www.opticaloracle.com).

We think it's an apt time to look at optical companies again. Lately, there have been a few encouraging signs in the market. First, large Wall Street investors are at least considering the sector again, now that it’s been beaten down.

One of the most prominent examples is Bill Miller, the manager of the Legg Mason Inc. Value Trust fund who is famous for beating the S&P Index the last 10 years in a row. He was buying up telecom stocks in the second quarter (see Value Trust for commentary), including Corning, which influenced our decision to rate Corning number one.

Other sources we’ve been talking to are starting to come around on the sector, too. One hedge-fund manager who was consistently bearish on optical in the first half of the year is beginning to give it another look. “I’m starting to buy,” says the manager, who prefers not to be named. “This sector is going to play again – and there are now some real values out there.”

The chart of the Light Reading Index reflects some of this improving sentiment. As seen below, the steep decline seen in the first part of the year has gradually flattened out, and the chart is working hard to find a base. The bad news is that we are still seeing new lows – most recently in the 245 range. For now, it looks like we are in the third, drip-torture leg of the optical bear market – hopefully the final stage of the decline.

Given that stock markets tend to rebound before the economic environment does, we look forward to an uptick in the Light Reading stocks before the end of 2001. So we are picking those companies that are best positioned for recovery – which we anticipate will not be fully apparent until mid 2002. Mostly, we focused on companies that are either lean, mean, and focused on individual markets (Extreme, Juniper, ONI, Sonus), or those that have a solid market position generating steady cash flows and customer accounts (Qwest, EXFO, Digital Lightwave).

As for the question that some of our readers may pose: Where’s Cisco? It’s simply too big for our tastes. We feel more comfortable looking for growth in companies valued in the $1 billion to $15 billion range than trying to figure out whether Cisco, which is valued at $132 billion, will ever earn enough money to justify having the twelfth largest market capitalization of all the companies in the world (for a brief moment in 2000, Cisco was #1).



Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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