Dow Jones Newswires -- October 31, 2000
Dow Jones Newswires
SMARTMONEY.COM: This Is No Bubble
By JAMES B. STEWART
NEW YORK -- 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 ago.
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 maker of
fiber-optics components, 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).
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