The market tried to recover this week from the blow it received from Cisco a week ago. Until Thursday night, it looked like the market had calmed somewhat and perhaps found the bottom of the curve. Many traders assumed that the bad news was already reflected in share prices. Leading optical communications equipment manufacturer Ciena (Nasdaq: CIEN) even added to the feeling of security by beating the analysts’ forecasts and raising its own for the coming year – one of the few companies to do that this year.
Only last week, I warned that many in the capital markets assume that the market slowdown is a matter of a quarter or two. Practically everyone assumes that the second half of the year will be much better, although they have no real figures supporting this assumption. Everyone wanted to believe that everything will work out by the second half of the year – then along came Nortel and ruined many analysts’ basic assumption. Nortel notified everyone that the slowdown will deeply affect its results into the fourth quarter of the year, which is much more important than a change in profit forecasts, since it has implications for the rest of the market.
Many analysts who assumed that the current slowdown is an inventory correction that will last only a quarter or two and based their recommendation to buy shares on this assumption, because “the current prices already reflect the bad news” are liable to change their recommendations. If what Nortel said reflects what is really happening in the market, then we can expect to see another wave of profit warnings from all the companies that issued warnings only a month ago, saying that only one weak quarter was involved, or that it was a slight inventory problem. If that is what is in store, the Nasdaq has a long way to go before it hits the bottom.
When Friday’s plunge was in full force, George Gilder, one of the biggest technology investment experts, who publishes a prestigious journal to 60,000 subscribers, was interviewed by CNBC. Gilder, known as someone who can move shares, was more optimistic than ever. Gilder believes that we are only at the beginning of the revolution, which will see communications providers’ bandwidth widen a thousand-fold in the next ten years, thanks to the development of optical communications. Gilder’s broadband vision includes a trillion-dollar investment in optical equipment, which will benefit companies like JDS Uniphase (Nasdaq: JDSU), Avanex (Nasdaq: AVNX), Corning (NYSE: GLW), and many others in the field.
Institutional investors listen to what Gilder says, because he has been right on target for 20 years concerning every significant technology change in the market. Gilder’s current gamble is on optics. If he is right, we have a considerable buy opportunity, since most of these shares are traded two-digit percentages below their peak, while some even have reasonable p/e ratios (30-30). For anyone interested, Gilder prefers JDS Uniphase, Avanex, Global Crossing (NYSE: GX), and New Focus (Nasdaq: NUFO).
This week the “put” options worked overtime. The short position on Brocade Communications Systems (BRCD) made the difference. As we predicted, the market is no longer willing to pay three-digit multiples for companies with questionable growth rates. It was data storage companies’ turn this week. Brocade simply disintegrated, and our “put” options rose from $1 to $16.75, adding almost 3% to the portfolio. This week we retained our short positions on Check Point (Nasdaq: CHKP) and Research in Motion (Nasdaq: RIMM), and I assume we will add more short positions next week.
Sanmina (Nasdaq: SANM) and Flextronics International (Nasdaq: FLEX) tried to recover this week, but Nortel’s profit warning set them falling again. Nortel is the main customer of Sanmina, which took a hard shot on Friday. Considering the wave of profit warnings from its customers, I will not be surprised if EMS (electronic manufacturing service) companies also publish profit warnings. Nevertheless, we plan to maintain our position in the field, since the future of the EMS companies still appears bright.
Riverstone Networks (Nasdaq: RSTN) managed to complete its IPO on Friday. We find this interesting for two reasons: first, the ability of a still unprofitable technology company to complete an IP is important and may signify the opening of the IPO market. Secondly, Riverstone competes with MRV Communications’s (Nasdaq: MRVC) company Charlotte’s Web Networks. Like Charlotte’s Web, Riverstone supplies high-speed routers for communications providers, competing with Cisco, Juniper Networks, and Avici. Riverstone traded higher on its first day, an awful day for Nasdaq, which is definitely a positive sign. The company is traded at a value of $1.3 billion, added testimony to the value Charlotte’s Web is likely to get in an IPO or acquisition.
The above recommendations were made by a person/s working in the investment industry, who may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.
Published by Israel's Business Arena on February 20, 2001