One of the most interesting things about stock investment is that canny investors never fork out their hard earned money for a 'perfect stock'. Instead, they buy a 'bad' stock in the hope that things will pan out in their favor. While this age-old strategy continues to rake in handsomely for some investors, on many occasions it also rears its ugly end to an unsuspecting lot.
How do you ascertain the ability of an underperforming stock to reverse its fortunes and give you back a sizeable return on your investment? The reality is that you can never be too sure. Nonetheless there are some next-to-certain indicators that can set you on your way. These are the indicators that I see in Alcatel Lucent (ALU). Despite its past lackluster performance, I am convinced that there is a huge potential upside in Alcatel. Prevailing conditions surrounding the stock, coupled with changes in the broader sector landscape, present a good entry point.
Lightradio architecture may restore 'go to brand' status
One of Alcatel's greatest pitfalls was its attempt to diversify. By dipping its toe into virtually every segment of the industry, the once formidable force lost credibility as the 'go to brand', and some pundits even argue that the telecom bigwig lost its true identify, an argument that I concur with. I mean, Alcatel has interests in enterprise, managed services, third party products and so much more. It's high time it shed off all its redundant operations and directed its efforts toward promising fields. Incidentally, this is what Alcatel is doing with Lightradio architecture. This technology, which helps boost network capacity in high-traffic areas, will greatly help Alcatel to restore its reputation as a leading end-to-end network infrastructure vendor.
In addition, Lightradio architecture will greatly brighten prospects in the foreseeable future. Why do I say this? This architecture is primarily focused on LTE networks. Considering the expected upsurge and current expansive roll out of the 4G network in major global markets, Alcatel is staring at a wide range of opportunities. Already, Sprint (S) is using Alcatel's Lightradio architecture in its widely documented Network Vision Project. Looking at the fashion in which Sprint's footprint is expanding, I can comfortably argue that the Lightradio architecture will bloom alongside Sprint's network. Moreover, I am convinced this architecture is and will continue to ride on the tailwinds of the current 4G craze in the market.
The sell side is bullish, won't be long until prices go through the roof
In as much as there are a hundred and one factors that influence a stock's price, there is no formidable factor like sell side analysts. Many investors are inclined to follow what sell side analysts say. A good example is when Warren Buffett recommends a stock. Though not technically a sell side analyst, Buffett's recommendation will be swiftly succeeded by notable gains on share price.
As of the moment, most research firms are bullish about Alcatel. In fact, the telecom bigwig recently received multiple upgrades from Credit Suisse and UBS, where both shifted their recommendations from underperform to neutral.
Most of the bullishness comes from the expected cash inflows in 2015. While this seems a long way from now, capital infusions from Goldman Sachs are expected to be instrumental in propping up the expected cash burn in 2013 and 2014. In addition, the slant taken by sell side analysts is consistent with reports on the sector as a whole; the next few years are expected to favor Alcatel alongside its close competitor Ericsson (ERIC).
Analysts are inclined to believe that the communication equipment industry comeback is imminent. They argue that tablets and smartphones have surged over the 60 percent threshold in key markets, necessitating the need for reliable and more efficient networks. Personally, I believe that the complexity in current networks is inflating maintenance and management costs for most network owners. The need for innovation is therefore rife and this presents a perfect opportunity for Alcatel, considering its restructuring efforts and recent advancements as far as innovation is concerned. In the same light, the cloud sector is also ballooning. The negative side to this has been frequent errors, as witnessed by the recurrent mishaps in Amazon's cloud service. New technologies in Alcatel's pipeline will be instrumental in solving some of these problems. I believe that the coming years will present a good opportunity for the telecom titan.
In conclusion, Alcatel's current price is at a ballpark figure of $1.5 to $2.0. Nonetheless, I believe that its share price will be in on a steady rise once the market starts to fully appreciate the positive progress at the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.