Optical Networking Stocks: Following George Gilder's Lead (FNSR, LNOP, WNTG)

by: Shlomi Cohen

At the beginning of the year, Jim Cramer gave a boost to nearly all the companies manufacturing optical components for high-speed communications networks. Thanks to him I did a 30% round in my portfolio in a two-week period on the stock of the sector leader, California-based JDS Uniphase (Nasdaq: JDSU). Cramer is no technology guru, but rather, a good trader who can identify momentum in stocks.

But exactly who triggered the momentum in optical stocks at the beginning of the year is unclear - did Cramer do it on his own, or did he pick up on share acquisitions in the field by the big institutional investors?

Today, after most of the optical stocks have fallen to almost half of their highs at the beginning of the year, I decided to read the recommendations of the man I feel is the only worthwhile technology guru, George Gilder [GG], and found some interesting comments by him on familiar companies such as Zoran Corp. (Nasdaq: ZRAN), LanOptics (Nasdaq: LNOP), Orckit Communications (Nasdaq: ORCT), KDDI, and even the upcoming IPO of Wintegra.

If Cramer is good share trader and a minor technology expert, GG is a brilliant technology expert and a bad trader. Together with his team, he identifies companies with amazing technologies, but then rushes to put them in his portfolio of recommended stocks before they have made either a single dollar in sales or a commercial breakthrough.

I have made the same mistake myself occasionally, and my portfolio includes stocks such as Microvision Inc. (Nasdaq: MVIS) alongside companies such as Orckit, that have gone within no time at all from zero sales to annual sales of $100 million. Incidentally, for all those worried about Microvision, GG also claims that a lot of patience is needed here, and that it will make its breakthrough in special monitors for the gadget sector. Among the Israeli companies that GG had in his portfolio and then removed after he despaired of them is Terayon Communication Systems Inc. (Nasdaq: TERN). GG’s biggest success ever was the early spotting of Qualcomm Inc. (Nasdaq: QCOM) as a supplier of revolutionary cellular chips.

In his monthly report published last Friday in his newsletter The Gilder Report, GG repeats what he has been saying for many years and which is only now being shown to be correct: The high speed communications network is the world’s future, and never mind all the daily trivia about oil prices, gold, the dollar, interest rates and Ben Bernanke. This is a “time to buy” says Gilder in the headline, by which he does not refer to the stock market in general, which he thinks will continue to drive us insane this summer. When Gilder says it’s time to buy, he refers to specific stocks that will benefit from investment in broadband, investment that he thinks will be massive and unstoppable.

As regards optic component companies, the heart of high-speed communications networks, GG actually recommends JDS’ rival Finisar Corp. (Nasdaq: FNSR), which he thinks was unjustly cut by one quarter following the posting of its results two weeks ago, despite the fact that it raised its guidance and will be traded at a reasonable multiple on the coming year. He considers Finisar a key supplier of optical components for Cisco (NASDAQ:CSCO), which recently “warned” Finisar to ramp up substantially its quantities next year, as it was reducing the number of suppliers it works with in this field.

GG has nothing but praise for Israeli company LanOptics (LNOP), because of the network processor developed by its only subsidiary EZchip Technologies. He praises the Japanese company KDDI, which has taken a step forward by “rebuilding its entire network around 10 gigabit per second carrier class Ethernet boxes, for what they call “triple play.” He notes Orckit subsidiary Corrigent as a supplier of special equipment with a super secret engine, which, to judge by its performance, is powered by the EZchip processor.

Now that he knows what Corrigent is doing in the metro field, it will be interesting to see whether GG will also take notice of Orckit. Either way, GG has, albeit unintentionally, provided disappointed Israelis with the answer about Orckit. KDDI has simply beat everyone to it, and we’ll all have to wait patiently for the next contracts since this has only just begun.

As for EZchip, GG notes that it has already achieved 90 design wins from potential clients, and is moving ahead with its third generation of network processors, NP3. He gives a clear hint of a potential further contract win with Cisco, in addition to Juniper Networks (Nasdaq: JNPR), and when asked on his blog whether he had any concrete information about this, he replied “no comment,” which caused even more excitement among LanOptics investors.

GG also talks about the strong ties between between EZchip and Marvell Technology Group (Nasdaq: MRVL), which he thinks should acquire EZchip, if it wants to compete with the network processor of Broadcom Corp (Nasdaq: BRCM). He also recommends participating in the IPO of another Israeli company, Wintegra (WNTG), whose technology complements that of EZchip.

Published by Globes [online], Israel business news - www.globes.co.il - on June 20, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.