Alcatel-Lucent (ALU) investors are bidding the stock up on what they believe is just cause, but it may be the stock is rising "just because." Both possibilities may prove true before this company's story has reached its end, though neither seems to be more probable than the other today. Either way, there's a way for nimble traders to play Alcatel-Lucent.
Alcatel's shares have doubled over the last four months on investor fervor and anticipation of a turnaround of this telecommunications player. A series of announcements have helped to lift the stock, including:
- The entrance of new CEO Michel Combes
- The declaration of the "Shift Plan" to turn around the company
- Reported revenue growth
- A strategic partnership with Qualcomm (QCOM) with more deals expected
- An effort to reduce the cost of $1 billion in debt financing
Investors seeking true value must discern here whether recent Alcatel-Lucent announcements will actually create enough value to lift the company out from under the debt it is buried beneath. Also, they'll have to figure out whether the company's markets will support its business quickly enough for ALU to avoid being smothered by that same debt. In that regard, John Chambers, CEO of the company's peer Cisco Systems (CSCO), recently expressed concern about the global business outlook in his company's conference call. That has put the prospect of a quick recovery into doubt, but at the same time, the global economy appears to be improving, or at least some important regions within it are. Indeed, it would seem the company is at a critical point in its history at a dynamic time for the global economy. As a result, it has an opportunity to make a better way for itself or to finally fall away if it fails.
In past articles, I have questioned the company's ability and its will to really turn things around. These valid concerns and the current state of affairs have not mattered though, as the stock has gained ground on hope and (dare I say) greed. The reason for hope is obvious, given the turnaround effort. I dared to say greed because investors in stocks that are priced in penny stock territory below $5 per share and valued at a relative discount to peers, can lead people to pull out their calculators and estimate how much money could be made if and when the stock were to rise by a given amount. Oftentimes such reason is misplaced and costs prospectors capital.
So there are a series of issues at play, but for the most part they can be categorized into two groups, hope and reality. These two groups are not necessarily opposed to one another, and reality could prove as supportive as hope someday, but this has not been the case to date. I believe the stock has risen on hope and fallen on reality in its recent past.
So how does an investor handle a stock like this then? I suggest investors view Alcatel-Lucent as a trading play at this juncture in time. If "reality" starts to show real traction at the top and bottom lines of the income statement, then this trading play could become a long investment idea. As a trading play, which is where I see ALU today, I would expect the stock price to favor gains over declines in the period between earnings reports. This is the time period within which it is likely to announce positive news generally. However, at this juncture in ALU's development, I would sell out of any long positions and go neutral about a couple weeks ahead of the company's earnings release. Aggressive speculative investors might consider going short into the earnings report. Once/if the company actually turns around, this strategy should be abandoned and the company can be better valued as an investment idea. This is not the type of investing I generally do, but if I were to put money at risk in ALU, this is how I would do it. Obviously, this type of trading is risky, and is not appropriate for conservative investors or those with near-term needs for capital. Thus, I do not believe ALU should be bought by conservative investors, at least not yet.