Bookkeeping: Adding Tech Exposure with Ciena (CIEN)

The current market thesis, which I also believe will be proven wrong in time, is technology is a safe place to hide since it (a) does not have exposure to petrol in large part and (b) is more tied to corporate instead of consumer. So therefore its magic. That was the same thesis advanced last December (2007) when technology went on a tear, and then summarily was destroyed January - March 2008. But Wall Street is great at recycling old trash. I find the thesis inane but the relative outperformance of the NASDAQ is not to be argued with. So when 10,000 hedge fund computers say "this is the thesis" I am not going to argue with them.

I find very little growth in technology (hence struggle to find positions to add to the fund), and the irony is the main huge growers are indeed more tied to consumer (Apple (AAPL), Google (GOOG), and to a degree Research in Motion (RIMM)) than corporate. (exactly opposite of the current "thesis" by NYC traders) But somehow Wall Street believes a slowing consumer will not lead to a slowing corporate. That's Wall Street logic 101. Anyhow, I digress - let me just say I disagree with the logic but understand why it is happening... so if we do indeed get any rotation out of energy/commodities (folks, nothing straight up - this is coming from a major bull in the space) we need to have something working in our barbell approach.

I asked readers in early June what is your best tech idea [Jun 4: Readers - What is your 4th Best Technology Stock and Why?] since we could see the relative outperformance of technology and I wanted some more exposure over and above the names we already own. First, thanks for all your suggestions - I looked over the vast majority and most were names I already knew (or already suggested in the past) I was hoping for some magical bullet stock I had never heard of.

I was going to put a buy in yesterday in Broadcom (BRCM) a former holding in the fund [Oct 23: Broadcom Implodes After Hours], but the stock ripped 7% higher yesterday so I believed I missed a large part of the move I was hoping for... I was considering Akamai Technologies (AKAM) also a former fund holding [Oct 5: News Flow Just Never Gets Better at Akamai Technologies], but still am worried about the competition level. I was looking at Marvel Technology (MRVL) and Qualcomm (QCOM) - both are nice charts so they are promising and still potential names to add. I liked Dolby (DLB) but it didn't bounce yesterday with the NASDAQ boom (not sure if its considered a 'tech stock'), nor did Google (GOOG). But I decided for a perhaps a 3-5 week holding period to try Ciena (CIEN) which is a stock that brought us great success in 2007, and has been beaten with an ugly stick for no good reason. (also considering Juniper Networks (JNPR) for similar reasons)

Ciena is a "network" stock if you will (optical) - and as it has been in the past it has been punished for doing the unthinkable - spending on Research and Development. This is one of my pet peeves on Wall Street - they punish stocks for putting money towards their future because it might hurt results the next quarter. It's ludicrous, short sighted, and speaks to everything that Wall Street is. But it has happened (specific to Ciena more than once). The company reported a very nice earnings report June 5th, but has been hammered since.

• Communications equipment maker Ciena Corp (CIEN) posted better-than-expected quarterly profit, but its shares slipped 5 percent amid concerns about increased spending and lower margins.
• Net profit for Ciena, whose bigger rivals include Nortel Networks Corp (NT) and Alcatel-Lucent, was $23.8 million, or 23 cents a share for the fiscal second quarter ended April 30. That is up from $13.0 million, or 14 cents per share, a year earlier.
• Excluding special items, profit was 40 cents a share, beating analysts' average forecast of 37 cents, according to Reuters Estimates.
• Second quarter revenue rose 25 percent to $242.2 million.
• Looking ahead, Ciena remains optimistic about the full year and stood by its forecast for revenue growth of up to 27 percent. The company was comfortable with the average Wall Street analysts' forecast for third quarter revenue of about $253 million.
• However, it sees third quarter gross margin, adjusted for items, in "the low 50s" percentage range -- below the second quarter level of 54 percent.
• In addition, it expects to spend more on research and development for the remainder of 2008, and will likely exceed its targeted investment range of 12.5 to 15.5 percent of revenue. (the horror, spending goes up to keep technological innovation going - sell that stock!)
• Analysts on the call voiced concern about the company's spending plans and fluctuations in margins, given overall worries from the slowing economy and questions about the behavior of individual clients.
• Chief Technology Officer Steve Alexander pointed to the increasing importance of software in the company's portfolio. "We see lots of opportunities and we want to invest in them appropriately," he said.
• We have delivered more than that in the last few quarters," he said. "The company is growing very quickly -- faster than the market -- and we intend to continue to invest in a disciplined way. I don't know any other company around our space that is growing at 27 percent and delivering this kind of financial performance."

I've been watching with one eye, and the stock seemed to bottom yesterday, but I was hoping to get it at a bit of a lower price - it has seemed to reverse today in a very bad tape so I am going in... again, I find the reason for the sell off to be quite ridiculous but it's happened to me in the past in other technology stocks. I also like the fact that the earnings are out of the way, and the punishment has been administered - other technology stocks that the market is running to, still have to report in the coming month.

I bought a 2.2% stake in Ciena (CIEN) here near $26; short of a market waterfall selloff - upside to $29 should be achievable in the medium term. (11.5% gain) The stock was in the mid $30s a month ago (down 25% in 4 weeks). Downside should be near $24 which were January 2008 lows (aside from 1 or 2 days of panic selling) so I'll add there - I was hoping it would fall there yesterday :). The stock now trades at 16x October 2008 end of year earnings, for solid 15-20-25%ish growth.

Again let me reiterate I think the "tech is safe" trade is a hoax - but I'm just a minnow in a sea of hedge fund computers. So when/if commodities do ultimately break I want something to be working on our side. I don't know how long I'll hold Ciena, I see it more as a trade (for now) than an investment but we shall see how it plays out.

As for the market as a whole, we are now at March lows (S&P 1325) - if this breaks we should see real fear return to the market. So I am still not really buying much... again, our expectation is the technical buyers make a defense at these levels and we see some bounce. Unless that little party yesterday afternoon was "the bounce". Still no fear out there - this is what we need... too many hopeful bulls buying these dips to trust this is a good bottom...

[Mar 7: Ciena Continues to Execute]
[Jan 8: Closing Ciena]

Long Ciena in fund and personal account
Long Apple, Research Motion in fund; no personal positions