One word: optical.
OK, it's not exactly like in The Graduate, the fabulously funny movie in which Dustin Hoffman's character is told that the future is in plastics.
But if you did want to invest in the cyclically hottest area of tech right now, it would have to be in telco equipment, specifically anything related to higher-performance video through your cell phone.
The group's been a confusing one because of the quarter reported last by Cisco (CSCO), which contained almost nothing about telco-equipment spending. In fact, that quarter did more to obfuscate the unfolding positive story about telco spend than anything else, because it kept a lid on Ciena (CIEN) and Finisar (FNSR). After all, investors presumed, how good could it be for these also-rans when it's bad for Cisco?
In fact, I now think it is glaringly obvious -- although market disagrees with me -- that Cisco is actually having an amazing quarter. But can you really say that as you lay off 4,000 people? Can CEO John Chambers declare, "This is the age of renewed telco spend, but forgive us while we ax 4,000?" No, he can't. Not Chambers. That's not his style. Unfortunately that means you won't know that anything really good is happening there until you see the quarter, which is ages away.
But there are so many other ways to play it. Last Friday I posited that the news flow out Alcatel Lucent (ALU) is going to get better and better. New management -- even, at last, a new chief financial officer ¿ will at last be in shape to translate orders into profits, and I think that Alcatel Lucent is going to get more than its fair share of European orders. Don't forget that Vodafone (VOD) will be flush with cash to build out whatever it needs, and that means some hefty orders for Alcatel Lucent. Alcatel might be one of the most exciting speculations in the world right now. I love how people tell me how I have missed it because the stock had been at $2. But that's the same catcalling I heard when I said that Nokia (NOK) was too cheap to avoid at $4. Where was I at $3?
We know that Finisar just reported a terrific quarter. I think it is still cheap, but how about the test and measurement of optical fibers? That's a business that's owned by JDS Uniphase (JDSU). JDSU is a cats-and-dogs company that, as the orders come through for its equipment, might be worth dramatically more now than what the stock is selling for. The company isn't due to report until Oct. 30, but it's hard to believe it won't have some big orders to announce by then.
There's been a lid on Juniper (JNPR) ever since Cisco spoke. Everyone's always gun-shy about Juniper after multiple years of disappointment, but need I remind you that a rising tide does indeed lift all boats? I think that Juniper's having a fabulous quarter, but no one wants to get behind it. That's a mistake.
We know from Ciena that business is very strong, but that stock's just had a humongous move, and I think needs to see a pullback before you go after it again. However, last week, when I spoke to Xilinx (XLNX), the company made this very clear: The money from Sprint (S), T-Mobile (TMUS) and AT&T (T) is being spent with alacrity now that the first two have rich foreign backers and the last is furiously trying to catch up in quality to Verizon (VZ) Wireless. Don't forget, again, how much Vodafone has to order from Xilinx in order to get its network up to snuff.
This fourth quarter, historically strong for this group, could be explosive. Only Ciena reflects that right now. Soon they all will, but it's not too late to buy any of them to play this next generation of telco spend, the one that seems to have been delayed for years and that is at last upon us.
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