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Technology Stocks : Ciena (CIEN)
CIEN 194.70+9.2%Nov 24 4:00 PM EST
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To: craig crawford who wrote (1872)4/2/1998 1:12:00 PM
From: Sam Citron  Read Replies (2) of 12623
 
Craig,

Ciena exploited their first-to-market advantage as far as it can go. Now that the race is on, LU's incumbent advantages are plain for all to see. The superior solution is not necessarily the most powerful. Lucent successfully demonstrated a 256-wave system over a year ago. But nobody needs that much capacity today. They simply want a cost-effective solution that is scalable to meet tomorrow's needs from a supplier they KNOW is going to be around. They are very COMFORTABLE buying telecom equipment from LU, because of their long-established relationships with this company.

What you say about the disparity in P/S is largely correct. Bigger margins and smaller sales traditionally get higher P/S. However, O'Shaughnessey shows that P/S is one of the most important indicators of future performance. The point is that such abnormally high margins tend to be a fluke, inviting competition. Competition brings a reversion toward the mean. Therefore, I am always looking for sources of long-term comparative advantage. That takes competitive analysis. I might suggest that you have a look at Michael Porter's 20 year old book by this title. I think it might be useful to your investment decision-making.

SC
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