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Financial

Stock Shocks

At the risk of being lambasted by the “how dare you talk stocks” crowd, I think it’s important to update the performance of our Leading Lights Best Investment finalists from 2005. Why? Because we picked 'em. And they've all done pretty well. (See LR Names Best Investment Finalists.)

Some background: The Best Investment Potential award was given out to the company that represents the best long-term potential return on investment by virtue of solid management, product development, and market growth potential. There were five finalists. These companies were picked on November 21, 2005, so the performance is from that date to the close of market last Friday.

There is an old Wall Street adage, "Sell in May and go away," reflecting the fact that the general market often performs best between November and April, and then goes into a summer slumber – or worse – from May to October. This year, apparently, many folks have taken that advice. With it being May and some serious volatility revisiting global stock markets in the past week – the stock market in India fell 10 percent in just one day – it’s a good time to take a look at these Light Reading stocks and talk about where they might go.

Here's how they've done:

ADVA Optical Networking
    Nov. 21, 2005, price: €5.50
    May 19, 2006, price: €8.27
    Change: +55%
ADVA, also known as the “German Gem,” has performed like a Mercedes. And why not? It had all the attributes one likes: (1) Attractive market (metro optical and Ethernet); (2) Reasonable valuation (less than two times sales); and (3) Good earnings track record. (See ADVA Posts Q1, Optical's Future Looks Brighter, and ADVA's Still Shopping).

In fact, if I were to pick one stock that’s still an outstanding value, it’s ADVA. Because it’s traded in Germany, it receives a multiple substantially below its North American counterparts. Its recent acquisitions and new product launches in the metro Ethernet and optical markets are absolutely the right places to be. This is still an attractive stock.

JDSU (Nasdaq: JDSU; Toronto: JDU)
    Nov. 21, 2005, price: $2.15
    May 19, 2006, price: $2.78
    Change: +33%
CEO Kevin Kennedy’s turnaround has progressed well and, as anticipated, the optical components space has continued to rationalize. Where do we go from here? Frankly, if we bought this one, we’d be content with a 33 percent gain in six months. But we don’t expect the stock to crash anytime soon. Many restructuring benefits are still likely to come.

If you didn't buy before the rally started last fall, this stock is probably too risky up here. With the market rally on the rocks, it's best to steer clear of single-digit midgets. We also noticed that JDSU recently issued some new debt. (See JDSU Issues Debt Notices).

It's safe to expect JDSU to chug along in the $2 to $4 range through the summer. In the fall, look for new visibility into the outlook for the second half of the year – and the market in general – each of which may provide a better window of opportunity. (See Whispers Shout Down JDSU, JDSU Buys a Bit of Test, JDSU Inches Toward Profits, and Notes From Needham .)

Motorola Inc. (NYSE: MOT)
    Nov. 21, 2005, price: $23.75
    May 19, 2006, price: $21.42
    Change: -10%
Motorolewww, our only loser. No worries – it’s got a price/earnings ratio of 11. And $10 billion in cash. Even if the market crashes, this stock did not bubble like many other tech stocks, and its cash cushion provides downside protection.

We think Motorola’s Q device is going to be hot. (See Moto's Q Pulls Up to the Curb.) This seems like a silly stock to dump, if you are considering a loss. (See Motorola Makes WiMax Breakthrough , Verizon Moves Toward Home Gateway, and Moto Rides RAZR to Strong Q1.)

Neustar Inc. (NYSE: NSR)
    Nov. 21, 2005, price: $31
    May 19, 2006, price: $33.26
    Change: +6%
Neustar, admittedly, has been a bit of a disappointment. The company's revenue growth has been subdued, even though it's solidly profitable. I still like the fact that it owns a government franchise in VOIP and ENUM databases. Management could do a little more to boost its visibility, but Neustar’s in a position to rule the future of VOIP databases. If the company can get its next-generation story together, this one could take off.

The bottom line: The trajectory of earnings and revenue has been up. There have been no serious hiccups, and we don't see any on the horizon. (See NeuStar Buys DNS Player, NeuStar Reports Q4, NeuStar Moves Into SIP Peering, and Telecom's New Star.)

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digits 12/5/2012 | 3:53:12 AM
re: Stock Shocks you mean the stock, rather than the company... :-)
Scott Raynovich 12/5/2012 | 3:53:12 AM
re: Stock Shocks Hmmm, not many postings out there... I guess nobody bought Redback.
Scott Raynovich 12/5/2012 | 3:53:11 AM
re: Stock Shocks both
Peter Heywood 12/5/2012 | 3:53:01 AM
re: Stock Shocks What about the longer term future for the telecom industry, for investors who prefer to bet on fundamentals rather than temporary swings in market sentiment?

Personally, I'm pretty gloomy about the likely long term fortunes of most of the companies on our list. They're facing:

- long term reduction in size of the telecom infrastructure market, as a result of convergence.

- standardization and commoditization of telecom hardware (ATCA) and software (IMS), which will open markets to much stronger competition

- arrival of new competitors from China, India, Russia

On top of all this, I don't really see telecom operators being able to transform themselves in service supermarkets. So they're not going to be the ones placing orders in the growth market of the future - network enabled applications.





alchemy 12/5/2012 | 3:53:00 AM
re: Stock Shocks
- long term reduction in size of the telecom infrastructure market, as a result of convergence.

- standardization and commoditization of telecom hardware (ATCA) and software (IMS), which will open markets to much stronger competition
- arrival of new competitors from China, India, Russia


I disagree. Prior to 1990, we had convergence since everything was circuit switched. What's the difference between a 1200 baud modem in 1982 and a T1 PseudoWire box in 2005? (other than perceived market size). There are still lots of market opportunities for innovative companies.

The one thing about standardization (ATCA and IMS) is that those standards look laughably archaic fifteen years later. How do VME, MVIP, and AIN look today?

Personally, I'm not all that worried about competition from China, India, and Russia. I'm more worried about the poor quality of the new entrants to the US work force. I don't see US-born new grads who are willing to work hard. Too much wealth seems to have created a sense of entitlement.

On top of all this, I don't really see telecom operators being able to transform themselves in service supermarkets. So they're not going to be the ones placing orders in the growth market of the future - network enabled applications.

Who says service supermarkets have to come from the telecom operators? I see Cable eating their lunch in the core quadruple play business (phone, cell phone/mobile devices, internet, television) as the "new" telecom operators. I see the Googles and eBays of the world riding on top of that infrastructure. I also hear endless speculation that Google will buy RF spectrum and become their own teleocm operator.
very_objective_dude 12/5/2012 | 3:52:56 AM
re: Stock Shocks Just to chime in my 2 cents. Google buying RF spectrum would be a bad move. Too much diversification into customers' products and services will just water down the whole business focus. Basically, you are not this nor that, you are half competitor and half provider. You can't fool your customers.

If anyone remembers Excite at all, it is no longer around. Excite bought @Home to diversify. Excite even was on TV showing how cool it was to work there....... similar to Google....??? So, when a company is riding the rising tide, it has to know what to do, not just do anything and expect a good ROI.
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