When a sector sits in the top 5% of sector performance, it is often a safe bet that momentum investors have crowded into the stocks, and expectations are running hot. Unfortunately, the very nature of the momentum game means that the stocks can get rocked at the first sight of cracks in the growth story.

Such is the case for companies in the telecomm equipment space these days.

IN PICTURES: 5 Steps Of A Bubble

Investors had been piling into stocks like JDS Uniphase (Nasdaq:JDSU), Finisar (Nasdaq:FNSR) and Ciena (Nasdaq:CIEN) on the idea that the spread of smartphones and tablets is going to strain the networks of service providers even further and lead to significant capacity upgrades. To be fair, growth had been looking good off the bottoms of the recession and demand in China has been strong.

Unfortunately for investors, it looks like the sector has hit a pothole. Although JDSU gave pretty encouraging guidance not all that long ago, Finisar had a much less rosy outlook. Not only did Finisar cite weaker growth in China as a proximate cause, the company indicated it was an industry-wide phenomenon. Couple that with disappointing guidance from Ciena, and the stage was set for a significant pullback.

Where To from Here
As the following table suggests, investors are not exactly looking at bargain valuations in the sector even after some corrections. Investors should also note that the impressive-looking revenue growth estimates likely will be coming down as analysts refine and readjust their models in the wake of these announcements and guidance.

Ticker EV / Rev EV / EBITDA Two-Year Est Rev Growth (CAGR) 12-Month Stock Perf.
JDS Uniphase (Nasdaq:JDSU) 3.4 30.9 22% 84%
Opnext (Nasdaq:OPXT) 0.9 n/m 16% 32%
Oclaro (Nasdaq:OCLR) 1.7 22.3 19% 18%
Oplink (Nasdaq:OPLK) 2.0 10.9 27% 34%
Finisar (Nasdaq:FNSR) 3.8 25.5 36% 80%
Corning (NYSE:GLW) 4.8 13.8 13% 20%
Ciena (Nasdaq:CIEN) 2.6 nm 30% 57%
Infinera (Nasdaq:INFN) 1.3 nm 6% -3%
Alcatel-Lucent (NYSE:ALU) 0.5 20.6 7% 55%

At least relative to JDSU, Opnext (Nasdaq:OPXT), Oclaro (Nasdaq:OCLR) and Oplink (Nasdaq:OPLK) look like they could be bargains. The problem, though, is that institutional investors are likely to run with the idea that if customers like Ciena, Huawei, ZTE and Alcatel-Lucent (NYSE:ALU) are pulling back, these smaller companies are going to be even more vulnerable to a slowdown. It may not be wise, fair or accurate, but in a twitchy market that has already enjoyed a good run, "shoot first, ask questions later" seems like the popular approach.

The Bottom Line
Investors have a few options today. The stocks of companies like Oplink, Oclaro and JDS Uniphase have already taken a pounding, and investors may just want to sit tight, wait it out and bank on the thesis that smartphone and tablet penetration is still quite low, and ongoing expansion will indeed require large-scale equipment upgrades from Verizon, AT&T and the like. Alternatively, investors could look at a more diversified and mature name like Corning (NYSE:GLW) - a name that does not have the same sort of volatility based on optical component market demand - as a compromise that gives them some of the same market exposure for less risk.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  3. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  4. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  7. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  8. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  9. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  10. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center