Ready To Wait For Nortel's Turnaround

The time is drawing near for me to average down on my Nortel Network shares. I was thinking of trying to rescue my beaten-up holdings from their 40% loss last summer by averaging down then, but decided a better entry point might come in December when tax-loss selling could put some downward pressures on the price.

Now the reverse split on Nov. 30 should add to the downward pressures: RBC Capital’s Mark Sue examined a number of recent reverse splits and found their shares fell an average 8% in the week afterward.

It may take another two or three years, but I am willing to give Mike Zafirovski’s turnaround effort some credence. After all, he has quite a track record as a “Mr Fix-it” at Motorola and General Electric. I’m also encouraged that George Putnam, editor of the Turnaround Letter, has Nortel on his by list.

Nortel has been at the precipice several times before only to leap over and go onto better things. The pattern seems to be thus: Canadian managers get in a pickle and then hand over the reigns to hard-driving Fortune 500 executives who were passed over for the CEO position and thus hungry to prove themselves.

As described in my book on Nortel (published back in 2000), there was John Lobb (ITT Corp.) in the 1970s, Edmund Fitzgerald (Cutler Hammer) in the 1980s, and Paul Stern (IBM and Unysis) in the 1990s. Plying Yankee management expertise, they turned the ship around and took it to new ports. Hopefully history will repeat with Mike Z.

Judging from the “dramatic” cost-cutting plan recently announced, Nortel appears to be getting more serious about becoming less of “a hobby for engineers.” Of note, cost-cutting plans call for slashing spending on administration and research & development (from 18 to 15 per cent of revenues). If and when Nortel becomes cash flow positive, investor attitudes should improve.

Forbes magazine recently ran a story on how Web 2.0 and the associated rise in video streaming and other bandwidth-intensive transmissions are compelling Internet carriers to expand their networks again. Also, Zafirovski has told investors that he expects to see higher margins on Nortel’s newer product lines as sales increase.

NT 1-yr. chart

Related Articles: Nortel May Sell Off Tomorrow On Reverse Split