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This article is a follow up to an earlier article. I repeat: several of these stocks are quite risky and should be, at most, a small part of a balanced portfolio. Visibility is low on the micro cap stocks, but experienced investors know that the majority of the growth in the stock market comes from outside the S&P 500 and Dow industrials. Data movement is increasing rapidly because CDNs and cloud networking specialists need to move larger amounts of data faster in order to be competitive with traditional networks; Cisco estimates total data transfer will increase 5X over the next five years; hard to imagine, but believable since AT&T increased wireless traffic 300% the last six months.

The National Broadband Initiative stimulus affected most of these stocks. The first tranche is 4.2B from the government and another 0.8B matching funds for a total of $5B. That is split among everything from rural computing centers to sophisticated packet software. Far over $20B of RFPs are competing for this $5B, so there is really no way to guess who will win in September; however, the government will try to be 'fair' and different sectors will get represented proportionately. Fiber is roundly expected to be half the spending (2.5B), including everything from actual fiber cables to software that runs the modulators that manipulate the laser signals (not to mention "administrative costs").

My response is to divide the fiber installation specialists who will be involved by market share, then give each a conservative cut; and, to assign ten percent to the optical and back haul companies and divide them by market share. I will discuss some companies that were not part of the original article.

Procera Networks (PKT) (0.68 to 0.59) got a nasty write up in They pointed out that PKT had a dilutive stock sale and is burning as much cash per quarter as they have in the bank. That was true, but PKT's sales are on pace to rise at least 20% for the year and become cash-flow neutral by the end of the year. PKT sells session border controllers (SBC), an annual market expected to grow 77% over the next four years, and intelligent packet inspection; PKT is in several partnership discussions and has a Tier 1 customer. SBCs are an important part of network capacity growth, so it is possible PKT will be acquired, and doubtful they will go BK. At 0.59, I would still be a buyer.

Fibertower (FTWR) (0.47 to 0.66) and Zhone (ZHNE) (0.42 to 0.58) already got exactly the bump I estimated for the stimulus. FTWR builds out fiber-connected and hybrid towers and are a good bet to thrive over the next four years while 4G is built out; and, ZHNE specializes in transitioning from copper to fiber. Both have plenty of cash, low enough debt, but have never made money. Sycamore (OTCQB:SCMR) (3.11) has so much cash they could liquidate tomorrow and you would make money -- and so diluted they may never reach a normal PEx. They seem to have missed the consolidation wave from 1H, and they must raise rev over a multiple of four to get a 16PEx at this price. This stock has little downside, but little visible upside either; they could absorb several million in stimulus and not move a penny; then again, we have all seen super cash-rich tech companies focus on R&D and get ahead of the curve, so who knows long-term.

Occam Networks OCNW (3.90) already got its stimulus bounce, as it should since it is a rural specialist; at 0.8 P/Sx and 1.5 P/Bx, it is still a good price. Powerwave (PWAV) (1.24) is operational cash flow positive, priced for bankruptcy at 0.2 P/Sx, and still waiting for a stimulus bounce; quarterly sales were down 45% YoY but cash flow does not lie, this company has strong international sales and is not going BK soon (as I warned before, Chinese customers over-ordered in 2Q, thus 3Q could be ugly, then 4Q good).

Finisar (FNSR) (0.63 to 0.94), JDSUniphase (JDSU) (5.80 to 7.02) and Opnext (OPXT) (2.25 to 2.71) are the #1-3 OCN subsystem and component suppliers. They all got their stimulus bumps already, so there is no upside there. FNSR's active optical cables are already being used in HPC networking even though standards have not even been developed. I have a hard time imagining any of these three will not double in the next two quarters because more fiber is absolutely necessary; JDSU has double exposure to stimulus because they are the optical testing leader-- every system installed will be tested. EXFO and XXIA are the other testing specialists, both should get a little bump. Long term, I do not like the fact that FNSR is heavily diluted at over 400M shares (which is why it receives so much hate), so I may sell after its steep rise once revs increase.

I simply forgot to include Oclaro (OCLR) (0.72 to 0.89) in the earlier article. No debt and lots of cash, OCLR is a combination of the best parts of two different optical companies, operation cash flow positive, and selling for 0.38x rev, ridiculous; many people lost money on OCLR's predecessors so it is widely hated as well. Oplink (OPLK) (13.81) did not make my P/Sx bargain list at 1.91. Its CR is 11.1 and has no debt; P/Sx in comm equip averages 4.4; they made money last quarter; and, they may be the best investment with only 20.5M shares outstanding and all the right customers. No stimulus bump yet, then should go up steadily as revs increase.

Harris Stratex Networks (HSTX) (6.32) is 'The worldwide WiMax specialist', just like five other companies, but their title did not keep them from losing Clearwire (CLWR) (and a lot of China) to Huawei (the new champ?). HSTX is strong in Africa and India and has several Tier 1 customers. WiMax is great for rural areas and the 2nd and 3rd World because it is relatively inexpensive, fast, simple and reliable and adaptable to current packet technology. HSTX has plenty of cash flow so I am surprised they did not get a stimulus bump; if you can get them around six and hold out until the stimulus funding is announced in September, you should be rewarded. I have the exact same advice for Adtran (ADTN) (22.63), an excellent company that is no bargain; ADTN already has experience with rural telecom, and no downside if I am wrong, solid.

ADC Telecom (ADCT) (8.04) was not part of my high-risk bargain portfolio, but it is priced at 0.7 P/Sx. Its price has been fluctuating wildly but appears to have a stimulus bump priced in. SInce ADCT is already cash flow positive, it should be profitable again before most of its competitors, thus I recommend this stock regardless.

The big guns are Tellabs (TLAB) (6.31), Motorola (MOT) (7.72) and Commscope (CTV) (26.04), 0.8x P/S. I am not impressed with TLAB long-term, but it gets the HSTX advice. MOT's price may not move even if they do score on stimulus, too many cell phone issues; of course, if they get good news on the stimulus and a good reaction on their new Android phones at the same time. CTV is exciting here: most of the companies listed here have segments that will not be effected by the stimulus -- every CTV segment is effected by the stimulus; furthermore, their sales are in the toilet because of the 1H Tier 1 telecom spending freeze, and as the cap ex spending ramps up again CTV's rev should go up substantially (T is expected to raise spending 30% 2H).

Ceragon (CRNT) (7.21) has a 1.2 P/Sx, a 1.4 P/Bx, and positive operational cash flow. DRGN, CRNT and ALVR are backhaul specialists that should get some stimulus dollars, esp CRNT. DRGN is no bargain and ALVR has a 1.0 P/Sx. AIRN (0.08) is on the verge of insolvency despite having some cash, but if they get a few million from stimulus they could have the most immediate upside -- VERY RISKY. Beware pump-n-dump on this stock.

Nextwave (WAVE) (0.33 to 0.83) merits a mention since they are up 151% since my article. No news, huge volume and very little accumulation make me guess a little institutional activity and and a lot of day-trader pump-n-dump. I have been making money trading this stock, but at $0.83 it is no longer a bargain; if Android phones sell great, I will get back in.

Since this article focuses so heavily on optical, INFN merits a mention. The stimulus is for last mile fiber, and INFN specializes in long-haul. First Huawei began taking large chunks of their value-priced long-haul, now Ciena (CIEN) appears to be competing on high-tech long-haul. INFN says they will be cash-flow neutral by the end of the year and make money next year and I believe it, but it has little upside at this price and is in a bad position long-term since it is getting forced into a very small niche. The CEO quitting is strongest factor.

This is not an exhaustive list, simply a mix of companies of which I keep track likely to effected by NBBI stimulus. The stocks under $2 are subject to manipulation, and the stocks under a $1 are often manipulated so be careful when investing. Networking, telecom and the cloud (the internet?) are becoming the same thing, so prepare for disruption as flexible companies lose revs but become more profitable and old work horses get plowed into the field.

Generated using InfonGen, Seeking Alpha transcripts


Source: How Will the NBBI Stimulus Affect Small and Medium Cap Communication Stocks?