Briefing.com Stock Brief: Traders Edge: New Focus (NUFO)
12-Jul-01 08:00 ET
[BRIEFING.COM - Damon Southward] More than a couple of CEOs have called this the worst downturn the technology sector has ever experienced. During this capital spending recession, staying in the game will be the name of the game.
Background
New Focus is a manufacturer of fiber optic products for next-generation optical networks, enabling networking solutions with increased channel counts, higher data rates, longer reach lengths and new services. Products include tunable laser modules, band splitters, beam combiners, and optical circulators. Corvis, Agilent, and Corning are among the company's top customers.
Trading Points
Cash Is King: When the dust settles, there will be far fewer companies on the playing field than began the year. Investor infatuation with initial public offerings opened the door for any company with a sexy product and at least a single customer to sell stock through an IPO. In many cases, the customer commitment was based on a company's willingness to issue discounted stock that effectively eliminated the financial risk to a customer of trying out an unproven technology... With these stocks now barely worth the paper they were written on, upstart companies are being forced to compete more aggressively on pricing. In some cases, technological superiority is taking a backseat to balance sheet issues of the supplier. Companies are look for suppliers that will be around two years from now.
New Focus ended the June quarter with with a cash balance of approximately $340 million. Company's anticipated Q2 net loss of $18-$21 mln suggests enough cash to last another 16+ quarters.
Clear Skies, For Now: During times of uncertainty, investors sell stocks first and ask questions later. Fear of being trapped in the stock at the time of an earnings warning have led investors to sell New Focus (NUFO $6.54) shares down from $15 since May. By the time New Focus issued its earnings warning on July 9, the stock had plunged to $6.20, or 59%.
NUFO now expects to post a Q2 loss of $0.25-$0.29 vs consensus loss estimate of $0.14. Company puts revenues in the $26.5 mln area, compared to previous guidance of $28-$32 mln... No surprise that investors used the company's earnings warning as a catalyst to return to the name, bidding the stock up 9% on the day. Issue has given up some of that ground in choppy trading over the past two days. But with the cloud of a potential earnings warning removed from the picture, NUFO shares are simply waiting on a strong day in the market to break out of its trading range.
Better Times Ahead: These days even bad news is processed in a positive light; unless, of course, it's really bad news. That is to say, investors have become almost impervious to the gloomy picture painted by company executives when they attempt to explain the magnitude of their quarterly shortfall. Investors are eager to use the dismantling of share prices that has occurred over the past year to begin (re)building positions in companies. The most important question to most of them is not which stock to buy, but when to pull the trigger... We think that with share prices of the technology sector's most dominant franchises trading at/near 52-week lows, investors will look to use incrementally positive news as a catalyst to return to the market.
NUFO Is a Runner: Traders tend congregate around stocks with legs. New Focus has proven that it falls into this category. Since the beginning of the year, the company has experienced rallies of 50% or more on four separate occasions, with the majority of the moves occurring over less than two weeks.
Conclusion
We don't think that the worst is over for New Focus or any of its competitors in the optical components space. What NUFO does have going for it is that 1) the company has the cash to make it a survivor of the shakeout, 2) is in a position to participate in the next leg up in the market as a result of the earnings warning cloud being removed from the picture, 3) traders love the stock.
NUFO faces its first level of resistance at $6.84, followed by congestion in the $7.00 area. A break here would set up stock for a possible near-term run to $7.50. An advance through this level would suggest that the shorts have gotten nervous and begun to bring in their positions... Protective stops should be placed just below June 22 gap support of $5.82.
Send comments or suggestions to Damon Southward
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