For starters, both the U.S. economy and the global economy are faring much better than most of the market expected. In fact, last Friday we saw February's retail sales blow away even the most optimistic forecasts. Sales excluding autos did particularly well, which is good news for Internet sales.
We also saw Cisco Systems Inc. (Nasdaq: CSCO) launch its new "super-router” which is many times faster than existing devices. This will speed up network traffic, enabling faster video, teleconferencing and downloading. More traffic means more bandwidth, and that means more infrastructure.
As I've said, the upside that I expect from the boom in data traffic has not yet been factored into stock prices. This is true for Cisco, Juniper Networks Inc. (NYSE: JNPR) and certainly JDS Uniphase Corp. (Nasdaq: JDSU). Just look at the performance of the exchange-traded fund (ETF) that best exemplifies it PowerShares Dynamic Networking (NYSE: PXQ).
However, PXQ has low volume and that is why I prefer to play the sector with specific stocks - where my risk-reward profile is far superior.
In any cast, there is a reason for this notable out-performance in comparison to both technology in general and the entire market: The broadband revolution.
You see, devices like Apple Inc.'s (Nasdaq: AAPL) iPad and iPhone - not to mention other competing smartphones like Google Inc.'s (Nadaq: GOOG) Android - and Amazon.com Inc.'s (Nasdaq: AMZN) Kindle, have initiated a technological revolution. And this revolution has stressed the current infrastructure beyond its limits.
As much as the telecommunications giants might want to resist it, they are being forced to upgrade their networks very quickly.
So, without going into my preferred plays lets analyze another likely beneficiary in the space: former high-flier JDS Uniphase.
The company is an agglomeration of acquisitions that simplified the buying process of key networking components to the telcos. Competing in a fragmented space and selling to a few large customers is very difficult. To make matters worse, the company flew very high during the 2000 tech bubble when stocks traded at multiples of sales, pricing in unrealistic sales growth. And in an industry that requires constant innovation, it is very difficult to stay ahead in terms of technology. So, from that standpoint, I believe that JDSU has a tough challenge ahead.
But there is hope, which is why I am writing today.
There are few things more profitable than investing in a turnaround - and JDSU, which had been left for dead, is making marked improvements. The stock appreciation is due to the renewed and ongoing cost discipline in the company and the positive prospects for this sector. The company beat earnings estimates by a mile in February and, true to the sector, gave cautious guidance. Wall Street followed suit and now they are all discovering that things are much better than expected. The broadband revolution is doing its work.
Also, JDSU has streamlined its business through efficient automatization, reducing its fixed cost basis and expanding margins even in these tough conditions. Now, with the cycle kicking in, the stock is already starting to anticipate a rapid rise in earnings.
Don't discount JDSU as a potential acquisition target, either. This should not be considered as a driver for your investment decision because it is baseless speculation at this point. But we already saw Ciena Corp. (Nasdaq: CIEN) acquire the optical assets of Nortel Networks Corp (OTC: NRTLQ), and there could be more consolidation ahead. JDSU's very solid balance sheet would allow them to pick up smaller companies, as well.
Longer term, either of those two scenarios would be positive for JDSU.
Notice how JDSU's quarterly losses have been lower and lower consistently. Soon, JDSU will turn the corner. And we will see a quick stock appreciation as it does so. So the weakness of being tied to capital spending from the telcos actually becomes a strength right now. Due to the cyclicality of the stock, at some point we will need to sell. But doing this today, at the beginning of the broadband traffic explosion would be premature.
So, we are going to recommend a small, speculative investment in JDSU's turnaround today, with a view towards rapid appreciation this year and into 2012 as the broadband revolution gains global traction.
Recommendation: Buy JDS Uniphase Corp. (Nasdaq: JDSU) at market (**).
(**) Horacio Marquez holds no interest in JDS Uniphase Corp.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
News and Related Story Links:
Buy, Sell or Hold: Juniper Networks Inc. (NYSE: JNPR) Will Be the Next Company to Profit from the Broadband Boom
Buy, Sell or Hold: Apple Inc.