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 Purchase Jon Markman's book "Swing Trading" at MSN Shopping. Related Resources See how StockScouter rates a stock View the all 50 top-rated stocks What were the best-performing industries? SuperModels Recent articles: • Growth signals turn yellow, 5/26/2004 • Mail call: Lottery picks (and pans) and a Belkin backlash, 5/19/2004 • Cant figure out the global economy? Go local, 5/12/2004 More... | SuperModels 3 battled-tested fiber-optic survivors under $5 Think back to when telecom's Big Vision meant big stock prices and then a big bust. Can a concept known as 'fiber to the premises' make companies like JDS Uniphase deliver this time? By Jon D. Markman Hey, remember telecom? You know, that wacky group of stocks that was supposed to make us all wildly rich because every single man, woman and dog in the developed world would one day log onto the Internet simultaneously, and then there were all those people in India and China that were going straight from rice-planting to instant messaging? There were a hundred ways to play this idea: Telephone carriers, switch makers, component makers, subcomponent makers, software makers and service providers. In the late 90s, we could rattle the names of leading companies off our tongues like choir boys reciting a capitalist catechism. Most of the zanier outliers of the telecom Class of 99 have met their makers. But a few hardware makers survived. The best shot up in value last year, but many have spent most of this year sinking straight back down. Surviving the Big Vision bust Lets spend a few moments looking at the most able of the walking wounded -- many of which are deservedly 98% off their 2000 highs but perhaps undeservedly 50% off their much lower January 2004 highs. Battle-tested, scarred but not dead, they represent ways to play a version of the 90s Big Vision that is slowly becoming rather real amid considerable skepticism.
Tops on the list is the granddaddy of them all -- JDS Uniphase Strangely enough, JDS Uniphase shares are now compelling. Courtesy of the overbuilding of fiber-optic capacity back in the day, the company now has just a fifth of its 2001 revenues, and revenue for the past nine months is still down over the prior nine months. And prices of the components it sells are still falling. But in its last earnings report, the company said spending by carriers on its type of equipment is finally improving. And it has survived the long and ugly post-bubble period as practically the lone fiber component maker that can deliver almost any piece a fiber-optic switch maker wants to put in a new box. Fit-with-fiber plays The story to become excited about now with fiber-optic suppliers is a concept called fiber to the premises. It represents just about the only way that the Baby Bells such as SBC Communications Baby Bells answer to this death knell is the prospect of far faster Internet broadband and video/television delivery over fiber-optic lines. Currently, the phone companys broadband solution, called Digital Subscriber Line or DSL, maxes out at about 1.5 megabits per second, though typical speed is around 768 kilobits. Thats generally a bit faster than cable speeds. But fiber optics will boost the speed as high as 100 Mbps, which is fast enough to make speed concerns absolutely a thing of the past, like party lines and single-phone households. Itll be nothing to download a feature film. Youll be skating on air. Cable cant match it. There is plenty of fiber-optic capacity in every major U.S. city. The problem is the cost of digging up roads to drag it from major routes to the streets where people live. Until now, the Bells have been reluctant to foot this cost. But recent indications of a positive regulatory stance from the Federal Communications Commission, plus pure desperation, has finally pushed them forward. In its earnings releases recently, Verizon has shouted to a skeptical world that it has begun the process. Analysts at The Yankee Group believe it. They recently estimated that Verizon will pass more than 350,000 customers by the end of 2004 with fiber-optics capacity, and in five years it expects deployment to reach 6 million homes, apartments and businesses -- generating $3 billion in revenue. With Verizon leading the way, fiber-to-the-premises will help the Bells keep their heads above water, but the phone companies are probably not the investment play. Possibly the best equity play is the beaten-up makers of the components that pump and multiplex the laser beams along the route from carriers central office toward the home. JDS Uniphase, at $3.37, is probably the main name to watch, but also consider photonic-processing component maker Avanex FA Asset Management value manager John LaForge, a big fan of both JDS and Avanex, said their business probably wont pick up for two quarters, but by then the story will be better known and prices will be higher. Business is turning for these guys, and no one wants to hear it, he said. Theyll want to own it when it pops to $5, but down here they think its a problem. Theyre wrong. There is not problem. Earnings have come in line two quarters in a row now, and theyve guided up 5% each time. Two more to dig into Last week, trade publication NetworkWorldFusion reported that Verizon was halfway done with the buildout of fiber-to-the-premises in one of its first markets: Keller, Texas, a city of 25,000. It reported that the fiber has been strung along aerial cables and in underground conduits, and buried in the ground through the suburbs neighborhood at a cost of $1,000 to $1,500 per home. All that digging and climbing has meant new work for a low-tech beneficiary of the last fiber boom -- construction companies. There used to be dozens of these sorts of outfits, but the telecom bust has left just few standing -- most notably Dycom MasTec spent many years rolling up competitors, but never invested in a computer system that would tie all its parts together. The company paid for that recently when it failed to file its 2003 annual report and first-quarter 2004 financial report with the Securities & Exchange Commission, and said it would have to both restate earnings and renegotiate loan covenants. LaForge, who specializes in what he calls broken stocks, said that if the 10Q is messy but not horrible, the stock could go to $6 in short order after it is filed. But he said he would double down if it went to $3 as the problems look worse than they are and, in any case, at that price almost any scenario short of bankruptcy would be discounted. Like most cool telecommunications ideas, this one is sure to be slower to get off the ground than advocates want. But the difference for investors now is that some of the key stocks are really pretty cheap, so the investment risks, while high, are not outrageous.
Fine Print To learn more about fiber-to-the-premises, visit this page at Lucents Web site for a good explanation. . . . For information about passive optical networks, visit Passive Optical Networks Forum. . . . There have been many company-specific press releases: Here is one. Industry groups have pressed the FCC to rule in the Baby Bell's favor, as in this piece. . . . Here is a cynical view from the Web site Light Reading. Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdmmail@hotpop.com. At the time of publication, Markman had no position in securities mentioned in this column. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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