Rally Lights Up LR Index
In late afternoon trading the Light Reading Index was up $7.12 (4.18%) to $177.46, with a quarter of the companies in the index gaining 10 percent or more.
Leading the charge was Redback Networks Inc. (Nasdaq: RBAK), which reported its third-quarter earnings last night (see Redback's Rough Road). Today the company’s stock rose 0.39 (23.78%) to 2.03. Even though it reported a $40 million loss on revenue that dropped by $20 million from the last quarter, the company managed to beat the revised analyst expectations that came after the company warned last month (see Redback Melts Down). It also announced further spending reductions through more job cuts. And it cancelled development of a smaller version of its optical transport platform, the SmartEdge 100.
Analysts say the company has to go back to its roots and effectively upgrade its Subscriber Management System (SMS) products.
“They need to scale the edge router to stay cash-flow positive,” says Steve Kamman, analyst with CIBC World Markets. “And if they can, they will have a viable business. What you see is people reacting to this bet.”
Other big winners in the Index today included optical system companies Ciena Corp. (Nasdaq: CIEN), which was up 1.78 (14.24%) to 14.26, and ONI Systems Inc. (Nasdaq: ONIS), up 0.99 (16.34%) to 7.05. Finisar Corp. (Nasdaq: FNSR), which may have seen a boost from insiders buying stock on the open market, was up 0.90 (19.20%) to 5.96 (see Finisar Execs Lead by Example ). Other top movers included Digital Lightwave Inc. (Nasdaq: DIGL), up 1.20 (20.69) to 7.00, and Avanex Corp. (Nasdaq: AVNX), up 0.69 (19.27%) to 4.27. Ethernet switch provider Extreme Networks Inc. (Nasdaq: EXTR) also moved up the charts 1.65 (16.10%) to 11.90.
Following the terrorist attacks of Sept. 11, the Light Reading Index plunged to an all-time low of 131.83. But since the beginning of October the Index has shot up 45.87 (34.8%) to 177.46. Has the telecom sector finally hit bottom? Most analysts say no. The sector fundamentals haven’t changed. At the end of the day, investors can’t ignore that AT&T Corp. (NYSE: T) still says that it is going to cut its capital spending by $2 billion for next year. Nor can they ignore the effects of Nortel Networks Corp.’s (NYSE/Toronto: NT) latest pre-announcement. Nortel was also up 0.16 (2.92%) to 5.64.
“Fundamentals haven’t improved,” says Nikos Theodosopoulos, a telecom equities analyst with UBS Warburg. “Most people are still expecting another negative year.”
But stock prices are very low right now, and some analysts suspect that today’s rally can be attributed in part to fund managers and other investors looking for deals on long-term investments.
“This is a tremendously good time to be picking up stocks that will survive the downturn,” says CIBC’s Kamman. “When growth comes back and things are flying high, investors don’t want to look back and say, ‘If only I had the sense to buy (fill in the blank).' ”
With the third-quarter earnings season just around the corner and end-of-the-year sellers looking to cut their losses for tax purposes, the rally may be short lived.
— Marguerite Reardon, Senior Editor, Light Reading