If you bought optical networking stocks at the beginning of last year, you had a VIP ticket to some major-league market volatility.
Investors experienced the thrill of victory in early-to-mid-2010, as optical component sales surged by 30% and stocks went on a tear. But by October of last year, the agony of defeat had set in as companies in the sector reported slower revenue growth — a revelation that slashed share prices by as much as half.
Why the fall from grace? The optical component sector was starting to look a lot like the market bubble that burst a decade ago. Back then, a slowdown in service provider upgrades left tons of components gathering dust in manufacturers’ warehouses. While there are common characteristics between market volatility over the past two years and the 1999 boom and 2001 bust, the similarities aren’t necessarily harbingers of doom this time around.
Here’s why: A decade ago, the market was growing at an unsustainable 100% a year, according to market research firm LightCounting. Since then, manufacturing processes and supply chain management have become more efficient, making it easier to control costs and inventory. Demand for next-generation optical components is rising as carriers and wireless networks strive to upgrade infrastructure to handle the high-bandwidth data and video explosion.
“Sales of most products remained steady in early 2011 and they are clearly picking up in the second half of 2011,” says Vladimir Kozlov, founder and CEO of LightCounting. “We are certainly looking forward to a really good year in 2012.”
Here are four optical networking stocks to watch for growth:
- Ciena (NASDAQ:CIEN). One of Ciena’s focus areas is healthcare reform. The company is enabling the transfer of medical imaging and electronic health records for Ohio-based UC Health. At $13.60, CIEN is trading more than 32% above its 52-week low of $9.89 last month. With a market cap of $1.3 billion, CIEN has a price-to-earnings growth ratio of 1.37 and may be overvalued. The stock’s one-year return is negative 7.6%.
- Finisar (NASDAQ:FNSR). The company is betting big on mobile streaming to drive growth. At $19.69, FNSR is trading 60% above its 52-week low of $12.26 in August. With a market cap of nearly $1.8 billion, FNSR has a PEG ratio of 0.77, suggesting that the stock us undervalued. The stock’s one-year return is 1.5%.
- JDS Uniphase (NASDAQ:JDSU). Despite the impact of flooding in Thailand on its operations, the company’s earnings beat the street earlier this month. Its high-speed wireless and cable network sales should buoy revenues in the second half of next year. At $11.75, JDSU is trading 32% above its 52-week low of $8.59 last month. With a market cap of $2.7 billion, JDSU has a PEG ratio of 1.20, suggesting it may be overvalued. The stock’s one-year return is 0.7%.
- Oplink (NASDAQ:OPLK). Oplink is another company whose sales and earnings should bounce back as telecom companies invest in new infrastructure. At $17.24, OPLK is trading 28% above its 52-week low of $13.39 in August. With a market cap of $336 million, OPLK has a PEG ratio of 0.61, a sign it may be undervalued. The stock’s one-year return is negative 4%.
Bottom Line
Headwinds remain for the industry – particularly Europe’s challenges and supplier disruptions from the Thai flooding. But telecom, wireless, cable and other communications service providers still need networks that can support the capacity and speed requirements of skyrocketing traffic. What’s more, these stocks are a bargain now.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
