Observers think that a recent spate of insider trading at Finisar Corp. (Nasdaq: FNSR) could maybe, just possibly, signal an upturn in the component manufacturer's fortunes.

The theory goes that corporate insiders, especially chief financial officers, have a pretty good idea of when their stock is undervalued. When they reach for their personal checkbooks, it's often a good time to buy.

And that's exactly what's been going on at Finisar over the last couple of weeks. On September 28th, Steve Workman, CFO of Finisar, picked up 10,000 shares at the bargain basement price of $3.80 a share, increasing his stake in the maker of optical and storage components to 542,082 shares. (At Wednesday’s $5 closing price, Workman had already racked up a 32 percent gain in less than two weeks.)

Workman's not the only insider making moves at Finisar. All of the following purchases were made in the last two weeks: Chairman Frank Levinson picked up 395,000 shares in the $3.63 to $4 range, increasing his holdings to nearly 44 million shares. Vice president Jan Lipson bought 2,000 shares at $4.13, raising his stake to 577,312 shares. Director Roger Ferguson bought 10,000 shares at $3.75, bringing his share total to 90,000. And director Larry Mitchell picked up 25,000 shares at $4.55.

Of course, buying back your own stock in a market as volatile as this one takes cojones and can misfire. Finisar was in freefall Tuesday, dipping to a low of $4.22, amidst reports of the company closing a convertible debt sale that would be tied to a 22.5 percent premium over Tuesday’s closing stock price. Still, it's bounced back since then. At press time today (Thursday) it was trading at $5.53, up 10 percent on the day.

Finisar issued a press release Wednesday that described the $100 million subordinated debt offering, which is convertible to 18.1 million shares at $5.52 a share (see Finisar Selling Securities). Debt holders are receiving 5.25 percent annual interest and will be able to convert their holdings in 90 days after the stock is registered with the Securities and Exchange Commission. The notes expire in seven years, but Finisar has the right to call them after three.

Prior to the Sept. 11 terrorist attacks, Finisar had intended to raise $200 million in debt. After that date, analysts doubted the company could raise anywhere near that, if anything at all. Even news reports Tuesday said the offering was to be only $75 million.

After brokerage commissions, Finisar netted $97 million from the offering. The company could also net another $24 million if note buyers exercise a 30-day option to purchase over-allotment shares.

The money could come in handy on a couple fronts. Workman hints that Finisar, which has a history of making acquisitions, may use some of the debt proceeds to buy companies or technologies at distressed prices.

It still may be better to sit on that cash. Nearly all the components Finisar sells go into data communications and storage area network (SAN) products. But even the hot optical and SAN markets have cooled, and Finisar burned $26 million in cash in its July quarter. At that rate, the company could exhaust its money supply over the next four or five quarters.

Now, even analysts who rate the company a Neutral say the cash position looks strong. But they still have concerns. Despite Finisar’s low stock price, some believe that the company’s valuation relative to its peers is high. For instance, Finisar trades at 3.8 times sales, while its key pure-play competitor, Stratos Lightwave LLC (Nasdaq: STLW), trades at only 2.4 times. Analysts project both companies will grow at a long-term rate of about 30 percent.

- Tom Davey, special to Light Reading, http://www.lightreading.com