Thread ---Part two ---7. Lucent Technologies
Which stock on our list has performed the best over the past three years? Microsoft? Cisco? Try Lucent. It has outgunned every one of the market's favorite stocks in its short lifetime. Can it keep surging? Absolutely. Can it return another 550 percent in the next three years? Probably not, though if it grows at even half that rate, investors will be very, very happy.
Lucent's success in the near future depends on whether it can continue growing by 20 percent a year. When you've got $33 billion in annual sales (three times that of Cisco), rapid growth gets harder. But Lucent has shown great skill at taking market share from rivals such as Alcatel and Siemens in its core business of selling equipment to telecom companies. It has also moved aggressively into new markets. With its acquisition of Ascend Communications -- and new products such as Softswitch, a voice and data integrator -- Lucent, already the leader in sales of voice- and optical-communications equipment to phone companies, is gearing up to battle Cisco in the data-communications-equipment market. For the immediate future, though, the two companies won't cross swords that often, especially since growth in the sector is so strong.
Lucent shares, while expensive at $66, are down from their July peak of $78, in part because of persistent concerns about its balance sheet. The company appears to have put to rest claims that it was manipulating its pension funds to boost company profits. Yet the latest worry -- rising accounts receivable -- has led to warnings that the company has been stuffing the sales channel to meet earnings expectations. That's the main reason the stock has languished over the past two months. But Lucent's management is too smart to try a trick like that, most analysts believe, and receivables should continue to fall in the next quarter. Sanford Bernstein analyst Paul Sagawa -- who recommended Ascend 18 months ago, before it rose fivefold -- says that if Lucent were really trying to boost its earnings with dubious sales, it would have already been caught. "The bear argument predicted the wheels would be falling off by now," says Sagawa. "But performance is great."
Is now the right time to load up on Lucent? Most analysts, citing the stock's P/E of 44 on next year's earnings, think the short-term upside is limited. "If you're looking beyond 12 months, this is as good a time as any to buy the stock," says Kenneth Leon, a Journal All-Star Analyst at ABN Amro. We agree.
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