Pat, Here is a little positive press from this morning's SmartMoney front page. Common Sense
This Is No Bubble
By James B. Stewart
October 31, 2000
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WOULDN'T IT BE NICE to have crystal-clear voice communication, video-on-demand and high-speed Internet access all from one reliable source? Of course it would. We've been hearing about it for years. Futurist George Gilder has written a best-selling book about the coming "Telecosm." It's been the Holy Grail for telecom-service providers. We're willing to pay for it, and someone stands to reap big profits. So where is it?
I'm not a physicist, but here's the problem in a nutshell: Copper wires, the basis for the nation's telephone infrastructure, are great for voice communication, OK for high-speed data transmission and poor for so-called broadband services, including video. Cable-television wires, which now reach a large percentage of the nation's homes, are good for broadband, OK for high-speed data and, as AT&T (T) has been learning the hard way, poor for voice. Satellite links may hold technological promise, but they're proving a business fiasco. The Motorola (MOT)-backed Iridium is already in bankruptcy, and the writing is on the wall for struggling Globalstar Telecommunications (GSTRF).
The answer, I learned from several experts in the field, is clearly fiber-optic cable. Optical links have it all: clarity, speed and capacity. Think of that the next time you struggle with a wireless Internet connection. The only problem with optical cable is that we don't yet have an optical infrastructure. And building it promises to be one of the biggest and costliest projects in history. Yet it's already underway. Major companies have built or are completing major long-distance pipelines. BellSouth (BLS) is the first of the regional operating companies to begin installing fiber-optic cable directly into the home.
This is why I want to own some positions in companies likely to profit from this enormous undertaking. I'm hardly the first investor to come to this conclusion, of course. Stocks in the fiber-optic companies had risen so fast during the past year, and stayed at such high levels even during the recent Nasdaq plunge, that I was beginning to despair that I would have the opportunity to buy these stocks at prices I could live with.
Then, last week, Nortel Networks (NT) came to my rescue when it warned of slightly slowing demand for its optical-networking components, and the bottom fell out. As I'd feared, the optical sector wasn't priced for any bad news, no matter how transient that news might be. These once seemingly invincible stocks plunged anywhere from 15% to 30%. As of Monday, they were still dropping like rocks.
Many are still expensive by traditional measures. But so was Intel (INTC) at times in the 1980s, when even the most optimistic investors underestimated the scope of the PC revolution. Ditto for Cisco Systems (CSCO) in the 1990s, before the promise of networking was realized. The market's romance with the promise of the Internet has proven short-lived. Now its more typical obsession with short-term earnings and revenues has reasserted itself, which can make it vulnerable to myopia, especially when a technology revolution is underway whose ultimate dimensions are still hard to imagine. So in the optical area, I'm not going to get too hung up on current valuations. What I can say with certainty is that these stocks are dramatically cheaper now than they were a week go.
What has really changed to justify the drop, besides Nortel's slightly less optimistic forecast? Not that much, according to recent statements by some of the leading companies in the field, including JDS Uniphase (JDSU) and Corning (GLW). Demand is still strong. The case for optical remains compelling. Even if capital spending slows, the work will still be done, just at a somewhat slower pace. On Monday, The Wall Street Journal reported that a respected consulting group, Ryan Hankin Kent, actually raised its forecast for 2001 spending on fiber-optic data-transport equipment to $20.6 billion from $19.4 billion, a 42% increase over 2000 spending.
In my view, it isn't necessary to invest in most of the more esoteric and high-risk companies in this field, where perhaps you do need a Ph.D. to understand what they're doing. A gold-plated portfolio in this field could begin with Corning, which makes the glass fiber that's the backbone of the network and has reported a series of phenomenal earnings and revenue numbers. It should also include JDS Uniphase, the fiber-optics component maker, which reported reassuring earnings last week. CIENA (CIEN) is the leader in optical switching and has just launched, to much acclaim, a new generation of products. Juniper Networks (JNPR), a technological leader in optical networking, also reported strong earnings growth this month. And, as I've said in previous columns, investors shouldn't overlook Nortel, which remains a leader in the optical field.
Last week I took advantage of the sell-off to buy small amounts of Corning, Ciena and JDS Uniphase. I balked at Juniper, which still seemed too expensive to me. I guess it's my streak of Midwestern thrift. All of them are now even cheaper, and even Juniper is beginning to look reasonable. But I suspect there's no rush. The sector is still looking for a bottom.
For other recommendations, I turned to Salomon Smith Barney analyst B. Alexander Henderson, whose coverage of the sector is extensive and whose recent reports have impressed me. His favorites, besides Ciena, are Sycamore Networks (SCMR) in the networking area and ONI Systems (ONIS), a company addressing the so-called last mile problem of delivering optical signals to the end user. I like both, though I deem ONI Systems highly speculative because it has no earnings. He also likes Nortel, writing that "NT's recent correction set up what we consider a strong buying opportunity."
A few commentators have compared the optical sector to the once-highflying Internet stocks, warning that a similar bubble will soon burst. Such views may account for some of the recent sell-off, but in my view, they're ridiculous. Many of those soaring Internet companies had no earnings and no business plan that made any sense. For contrast, just read Corning's most recent earnings report. The earnings are real, and they aren't going to disappear overnight.
Incidentally, I financed these recent purchases by selling a long-term position in Exxon Mobil (XOM), which I inherited when Exxon acquired Mobil. I believe oil stocks are at or near a cyclical high, and besides, I don't like the fact that Exxon revoked employee benefits that Mobil had conferred on unmarried partners. Discrimination, besides being morally offensive, is simply bad business, in my view. I still own a position in Royal Dutch Petroleum (RD). Though I'm not buying oil stocks now, should oil prices decline, I would buy Chevron (CHV) to take advantage of its proposed merger with Texaco (TX).
I have been reading with interest the debate about projections in the optical market on this board. It is interesting that the projected revisions have all been upwards by RHK. I firmly believe that there is unlimited growth in the buildout of fiberoptics for the foreseable future. Videoconferencing at work, at home, downloading movies on demand, talking to relatives face to face in another state or continent and other uses not even imagined yet-true virtual shopping,etc.... As these services become available they will create more demand, the prices will come down, further stimulating demand. Sure it is frustrating to see JDSU, SDLI and Nortel take major hits, but as a long term investor I increased my position in SDLI and bought some Nortel last week. Sold some Cisco to fund the Nortel.
Well I appreciate everyone's effort to bring info to the board and I guess over the next several years we will see who is right.
Regards, Trip |
