Morgan Report Socks Equipment Stocks

Investors who were once enamored of all things optical seem suddenly to have turned as skittish as a turkey in November. Today (Monday) networking equipment stocks bore the brunt of investor skepticism as Morgan Stanley Dean Witter lowered its price target on Cisco Systems Inc. (Nasdaq: CSCO) and downgraded Cisco competitors Juniper Networks Inc. (Nasdaq: JNPR) and Redback Networks Inc. (Nasdaq: RBAK).

The Morgan Stanley move caused strong reactions in the market. Its comments are an indicator, albeit a late one, of uncertainty over carrier spending and worries about slowing growth in the telecommunications and networking sectors. While handing out downgrades, however, Morgan Stanley spared the companies it had highlighted in a previous report on how carrier spending would not adversely affect some optical stocks (see Analyst Report Defends Optical).

In today's report, Morgan Stanley told clients that a slowing economy and carrier pullbacks on capital spending were among the reasons for its actions. The influential brokerage house lowered its price target for Cisco from $90 to $75 and downgraded Juniper and Redback from "strong buy" to "outperform."

"You have to pay attention to capital spending, because things like that create uncertainty and that translates to people not wanting to own these stocks," says Christopher Thiessen, a portfolio manager with Metamarkets.com (see Cisco Caught by Capex Concerns).

"Investors are asking themselves, 'If there are these [carrier spending] concerns, why are these [equipment stock] valuations so high,' " Thiessen continues. "If you don't have a clear-cut analysis of what people are going to be spending and when, then it gets harder to put a valuation on these stocks."

In today's late afternoon trading, Juniper had dropped more than $28 to $126; Redback was down $9.75 to $71; and Cisco lost nearly 4 percent of its value as its shares slipped $2 to $50.75.

Other equipment companies were found guilty by association with the optical market: Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) and Extreme Networks Inc. (Nasdaq: EXTR) both saw their shares lose more than 11 percent of their value in a single day. Corvis Corp. (Nasdaq: CORV), too, continued its jet-powered plummet into the abyss, as its stock has lost more than 41 percent of its value in the last five trading days (see Corvis Stock Tanks).

Interestingly, amidst this carnage were some opportunities for investors to revisit some battered bodies that, having already lost their momentum market valuations, seem safer for long term bets (see Nortel Bashing Continues and Optical Boosts Tellabs Quarter). "Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) is getting to a point where it's at a good valuation, and Nortel Networks Corp. (NYSE/Toronto: NT) is also getting to the point where it's worth the risk," says Thiessen.

During the late afternoon, Tellabs was up $1.38 to $57.25. And after The Wall Street Journal reported that Fidelity Investments had unloaded several million shares of Lucent Technologies Inc. (NYSE: LU) and Nortel during the third quarter, many investors saw it as an opportunity to buy in.

Nortel shares gained 4 percent, rising from $1.38 to $35.44, and Lucent had inched up $0.19 to $21.38 in the late afternoon.

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com

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