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Investing In Profitable Fiber Optics

|Includes: Alliance Fiber Optic Products, Inc. (AFOP)

Fiber optics is the go-to material when making wiring, especially for network cables. The reasoning is that the material offers flexibility with extreme strength and durability. The center of a fiber optic cable is simply the networking cables that provide the connection. The next layer is a strong, thick PVC encasing. Next, a strain relief material called aramid fibers covers the PVC component. Then the outer shell is usually made of PVC and provides extra protection and flexibility to the cable.

It is important to understand a company's product before you invest because if you do not understand what they make, you are putting your money at risk. If you can assess a product, how its made, what it is used for, then you will be ahead of the game and better able to decide if this is a good investment or not. Alliance Fiber Optic Products Inc. (NASDAQ: AFOP) is a name that I think stands out in the industry. In addition to your basic optic cables, the company makes a wide variety of fiber optic products for semiconductors and networking industry. The company faces high growth as firms seek to upgrade their networking gear and components, also known as capital expenditures.

Turning to the fundamentals, Alliance Fiber Optic has a market cap of $98.06 million and has a price to earnings of 10.4. The stock is at a serious discount when looking at its PEG of 0.42 and price to cash is a healthy 2.95. Alliance Fiber Optic has no debt and a cash per share ratio of 3.81; giving the company a healthy current ratio of 4.73. Additionally, the nice cash load allows the company to pay a 2.23 percent dividend. Earnings are expected to rise 122 percent this year and 25 percent over the next five years. Looking at margins, the company looks outstanding with a gross margin of 34 percent, operating margin of 12 percent and a profit margin of 21 percent.

As you can see, there is a lot to be bullish about on AFOP. The company is in a very niche industry that is in high demand. For example, the company reported record annual earnings in 2012. Revenues totaled $46.6 million or an 11 percent increase from fiscal 2011. Earnings per share totaled $1.10 compared to earnings per share of $0.50 in fiscal 2011. In addition, the company is forecasting high growth for the first quarter 2013 and full year.

One risk I see right now is in the technical. The stock hit top line resistance just below $13 and fell below its first support line, which is now looking like it has turned into resistance. What does it mean? It means that it is likely we could see the stock fall to its further support line of $10.15. From there, it is likely we will see a stabilization of the price action and the rise will continue. Other than that, I would say the risk is with the aging bull market. Either way, this is a great name for a long term investor looking for a great company with a decent yield.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.