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5 double-your-money tech survivors
These stocks have been through the wringer since the tech wreck, and the risks remain high. But each could double by the end of the year.
By Jim Jubak
Companies like Lucent Technologies, JDS Uniphase and Vitesse Semiconductor -- all still struggling survivors of the great tech wreck of 2000 -- have turned so many corners their stocks should be on wheels.
Over the last five years and counting, each pick-up in sales has been a momentary blip followed by another collapse in growth. Each reorganization has promised a return to black ink from red, but each has been followed by another wave of cost-cutting as revenues continued to decline.
So it's with trepidation that I say this, but right now I think the stocks of five of these companies, each selling for way less than $5, are solid speculative buys.
They're cheap. They'll soon have the wind of the end-of-the-year technology rally at their backs. And -- here's the wild part -- I think there are signs of real and sustainable improvement.
These stocks aren't for the weak of heart and, remember, a $3 stock can still cost you half your money if it drops to $1.50. But balancing that risk, I think investors stand a reasonable chance at getting a double out of these five stocks by year-end.
The stocks? Lucent Technologies (LU, news, msgs), JDS Uniphase (JDSU, news, msgs), Vitesse Semiconductor (VTSS, news, msgs), Conexant Systems (CNXT, news, msgs) and Anadigics (ANAD, news, msgs).
Lucent Technologies
I listed Lucent Technologies first, not because it's my top pick of these five, but because it illustrates what an investor is looking for in a $5 technology stock. First, Lucent's chart clearly shows the kind of base-building that an investor likes to see before buying. The shares hit a 52-week high of $4.16 back in November 2004 and a low in April 2005 at $2.35. But investors who are buying now have the comfort of the solid base the stock has built at around $3 a share.
Positive news has started to emerge in the telecommunications technology sector in the last quarter or two. In the second quarter, capital spending by U.S. carriers came in above Wall Street expectations as the largest of what used to be called the regional Bells, Verizon Communications (VZ, news, msgs), BellSouth (BLS, news, msgs) and SBC Communications (SBC, news, msgs), raised their spending on wire-line phone equipment. Three of the five largest cellular providers spent more as well. Legg Mason now forecasts that capital spending will total $12.8 billion for the third quarter and $50.6 billion for all of 2005. The increase is especially promising because communications capital spending almost always grows faster -- and faster than Wall Street expects -- in the second half of the year.
Related news and commentary on MSN Money
Besides such general growth in a company's addressable market, I'd like to see growth in the specific segments that the company has targeted with its products. So, for example, it's good news for Lucent that Sprint Nextel (S, news, msgs) has announced that it will increase its capital spending for 2005 to $5.6 billion from $5.4 billion and set its 2006 budget at $6 billion. Lucent, along with Nortel Networks (NT, news, msgs), is a major supplier of infrastructure for Sprint's wireless network. About 70% of Lucent's recent sales come from wireless equipment and services, and the company has built up a 50% share of the third-generation wireless capital spending commitments made by U.S. wireless companies.
The other four stocks on this list fit well into this general paradigm. Three of the four -- Vitesse, Conexant and Anadigics -- show surprisingly strong StockScouter ratings (7, 7 and 8, respectively) that signal their technical and fundamental momentum.
Vitesse Semiconductor
Frankly, I'm surprised that Vitesse survived the tech wreck of 2000. The shares suffered an even more spectacular plunge than Lucent's, falling from a high of $106 in March of 2000, compared to Lucent's high of $82 in December 1999. And, as a much smaller company, Vitesse had to scramble harder to find cash when sales collapsed from $442 million in fiscal 2000 to $156 million in fiscal 2003.
I wouldn't say Vitesse is completely out of the woods. It looks likely that revenue will dip in the fiscal year that ended Sept. 30, 2005, from fiscal 2004. But the company's new products do seem to be gaining sales. In the third quarter, revenue from new products increased by 26% from the second quarter. Most of this comes from new Ethernet local-area-networking chips. New chips for the company-wide storage market are expected to ramp up in the second half of calendar 2005. The company now projects that new products will account for about 50% of quarterly revenue by the middle of 2006. That depends, of course, on Vitesse getting these new products to market on schedule: The production ramp up of some of its storage products was recently delayed from the September to the December quarter. (Note that the company's CEO bought 10,000 shares of Vitesse stock in August.)
Conexant Systems
If Conexant can deliver on its projection of a return to the black in the December quarter, that ought to be enough to get the stock moving from the very long base shares have built near $2. In the June quarter, revenue increased 16% from the second quarter. The biggest contribution to growth came from the company's DSL division, where revenue climbed by more than 20% from the prior quarter. Gross margins have started to climb as sales volume picks up and the company cuts costs -- again. The company is now forecasting gross margins of 39% in the September quarter from an average of 34% over the last 12 months.
Anadigics
Anadigics is perhaps the riskiest of my gang of five -- but also potentially the most profitable. In mid-September, Anadigics raised its guidance for the September quarter that closed last week. Thanks to stronger-than-expected sales in the wireless-phone global-system market, the company said it expected sequential sales growth of about 20%, up from the 10% growth that the company had been projecting. That would still leave the company looking at a loss of 20 cents to 21 cents a share for the quarter.
The big obstacle preventing the company from reaching profitability is a state-of-the-art semiconductor fab (or factory, if you don't speak techie) that it finished building in 2001, just in time for the collapse of sales. At the company's current sales levels, the factory is running at just 35% to 40% of capacity. With that millstone around its neck, it's no wonder that Anadigics lost $1.65 a share in 2003, $1.32 a share in 2004 and 61 cents a share in the first two quarters of 2005.
But Wall Street now believes that the company will put that factory on the market, much as LSI Logic (LSI, news, msgs) did on Sept. 13, and go fab-less. That would reduce the company's current costs, since contracting production out to a chip manufacturer such as Taiwan Semiconductor (TSM, news, msgs) would allow Anadigics to capture greater economies of scale. It also would remove worries about how much the company will have to spend to keep its factories up to date with rapidly changing chip manufacturing technology.
A shutdown or spin-off of the fab would, says Think Equity Partners, give the company $10 million to $15 million in operating profit in 2006 and positive earnings of 25 cents to 35 cents a share. See why that just might make the stock pop? Of course, this restructuring is, so far, only in the minds of Wall Street investment bankers. See the risk?
JDS Uniphase
I've saved this one for last because it presents the greatest "timing" challenge. Not on the business side. There, I think the trend has recently become extremely clear: Demand for optical networking gear is finally recovering. The optical-transport equipment market grew 10% sequentially in the June quarter and is up 28% year to year. That's the strongest growth since, you guessed it, 2000. The market for long-haul optical equipment, the market that JDS Uniphase dominates, grew by 13% in the June quarter. The Wall Street consensus is now calling for break-even in the December quarter, and that seems extremely doable.
The timing problem is one that JDS Uniphase created with its Sept. 23 announcement that it would seek approval at its December shareholder meeting for a reverse split of its stock. Unlike the usual stock split, which gives an investor more shares -- perhaps two for every one -- at a proportionately lower price, a reverse split results in an investor holding fewer shares at a proportionately higher price. The company has proposed either a 1-to-8 or 1-to-10 reverse split. In theory, companies do reverse splits to raise the visibility of their stock -- more analysts will cover a $20 stock than a $2 stock -- and to increase institutional ownership of the shares -- some institutional money managers are prohibited from owning shares below a certain price. So, in theory, a reverse split would give JDS Uniphase stock more visibility, more ownership and a higher price.
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