By Michael Cintolo
As always, during this difficult market period I am working hard at building my Watch List and keeping it up to date. That last part—keeping it up to date—is difficult right now because earnings season is again upon us. And that means a daily dose of big gaps up and down among growth stocks, depending on how investors react to and interpret the news.
Thus, if you are going to be doing a little nibbling on stocks here and there (and I don’t think there’s much wrong with that, assuming you have plenty of cash on the sideline), you have two choices. First, you wait for a company to report earnings, and then look to buy afterward if the chart and story are still intact following the report.
Or you can look for strong, enticing growth stocks that aren’t set to report results for another few weeks, to give the new position time to develop a profit cushion for you before the quarterly report is out.
One stock that fills that bill is Finisar (NASDAQ:FNSR), which has shown up in Cabot Top Ten Weekly a few times this year, including a couple of times recently. It’s a story right out of 1999, as the company is the world’s largest supplier of optical gear for telecom equipment. And that means the company is riding the boom in bandwidth demand, which stems from the flood of data and video now traveling over telecom networks thanks to myriad smartphones and other wireless devices.
Verizon (NYSE:VZ) is pouring billions of dollars into its 4G network, and other providers like AT&T (NYSE:T) aren’t far behind. The new iPhone 4 (despite its well-publicized issues), the iPad and the popularity of Android phones should accelerate the need for faster networks, and Finisar’s equipment is a big part of that. I could get into more details, but honestly, that’s the ruling reason—more bandwidth means more demand for Finisar’s equipment.
As for business, it slipped a bit during the recession, but not tremendously (sales growth was down 11%, up 12% and down 1% during the final three quarters of 2009). And now it’s really ramping up—sales rose 33% and 76% the past two quarters, and estimates call for 56% and 41% the next two quarters. Earnings, by the way, have ramped up from three cents to 11 cents to 17 cents to 22 cents per share during the past four quarters.
The stock itself notched an impressive 10 weeks up in a row during February, March and early April before settling into its current choppy consolidation. The good news is that shares haven’t budged much despite the market’s correction—FNSR has actually hit a series of higher lows since early May, and is now within range of breaking out above 16.6. A strong-volume move above that level would be bullish.
And, as mentioned above, earnings aren’t out until September (its quarter doesn’t end until July 31), so buying a little here or on a decisive breakout has a good shot at working out. Just remember to keep positions small until the market enters a new, definitive uptrend!