Networking Stocks Take Charge
Although the telecommunications industry remains in a funk, following announcements from several carriers that there’d be further cuts in their equipment budgets for the year, the market rose with the feeling that possibly the worst news had already been built into many of the stocks.
”It’s not driven by fundamentals,” said Conrad Leifur, an analyst with U.S. Bancorp Piper Jaffray. “Maybe it’s that everybody feels like June is going to be the bottom.”
By late afternoon, the Light Reading Index had risen 25.99 (6.48%) to 420.65.
Most of the leading gainers in the Index were networking companies selling enterprise or metro gear. Cisco Systems Inc. (Nasdaq: CSCO), which announced a new metro DWDM optical networking product (see Cisco Piles On the DWDM ), was up 1.82 (10.22%) to 19.62 on heavy volume. Other leading gainers included Finisar Corp. (Nasdaq: FNSR), up 6.75 (an eye-popping 41.85%) to 22.88, and Redback Networks Inc. (Nasdaq: RBAK), which was up 4.51 (23.22%) to 23.93. Redback has been the subject of several takeover discussions in the past few months (see Redback and Juniper Talked, Balked). It was trading at more than double its average daily volume.
The rally comes after several telecommunications players had further reduced 2001 spending plans. For example, most recently, Williams Communications Group (NYSE: WCG) cut its 2001-2002 capital expenditure (capex) budget to $3.2 billion from $3.9 billion. Other carriers reducing their equipment budget include AT&T Corp. (NYSE: T), Verizon Communications (NYSE: VZ), and SBC Communications Inc. (NYSE: SBC).
In a note issued Wednesday morning, Morgan Stanley Dean Witter & Co. analyst David Jackson said Williams's action was bad news for its equipment providers, particularly Sycamore Networks Inc. (Nasdaq: SCMR). “We estimate that over 90% of this cutback will come from reduced payments for equipment,” wrote Jackson.
Yet, at the same time, Jackson felt the news wouldn’t have much affect on the stock price, which may have been the theme for the day: “We would be buyers of Sycamore's stock. We believe Sycamore stock already reflects production delays for its switch and uncertainty about large customers. If Sycamore can ship its switch on schedule, we think there is upside to the stock."
Late Wednesday, Sycamore was up 1.52 (13.97%) to 12.40.
At the same time, Jackson’s colleague at Morgan Stanley, Chris Stix, issued some bullish comments on the enterprise networking sector, saying that Cisco had gotten some of its inventory issues under control and that the sector was “stabilizing.” Stix’s comments were widely cited in the financial press and contributed to positive reporting on the networking sector, which may have helped fuel the rally throughout the day.
-- R. Scott Raynovich, Executive Editor, Light Reading http://www.lightreading.com