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TheStreet Open House

Fund Managers See Big Earnings, Growth for Sycamore Networks

Updated from 3:15 p.m. EDT

Who knew how many fund managers were tree-huggers?

Many fund managers have loved Sycamore Networks (SCMR) since they first laid eyes on it in October. They expected Thursday's earnings report to only make their passion more fervent.

In its stunning Oct. 22 debut , the fiber-optic networking shop's stock shot up a stunning 486%. Since then the highflier in perhaps the hottest sliver of the tech/telecom sector has kept heading north as fund managers have gobbled up its shares, most of which are still held by insiders at the Chelmsford, Mass.-based company.

On Thursday night Sycamore announced its fiscal fourth-quarter results, which exceeded expectations . But it's not necessarily all blue skies for the company that still depends on telecommunications shop Williams Communications (WCG) for most of its revenue and sells at a pie-in-the-sky price.

One in three tech funds already own shares in the young company. Fund managers betting on the sweeping transition from Old School electrical communications networks to more powerful and efficient fiber-optic networks are plowing money, more specifically your money, into Sycamore and its competitors. There's a good chance you own the stock through one or more funds given some managers' unbridled enthusiasm.

"Sell the house, sell your car, it's the world's greatest stock," Mark Sunderhuse of Denver-based Berger Funds says semi-facetiously. Kidding aside, he and his colleagues are clearly smitten. "We got involved at the IPO and I think it's in all of our funds, except (BEBAX) Balanced ."

If you own one of Sunderhuse's funds he's put your money where his mouth is. He co-manages two of the 10 funds with the biggest bet on the stock as of June 30: (BESLX) Berger Select , where Sycamore is the fund's top holding and a whopping 11.4% position, and (BEMGX) Berger Mid Cap Growth with a 2.3% position. On June 30 the stock was also among the top-10 holdings of the (BENGX) Berger New Generation fund, which he manages on his own.



Deep Roots
These 10 funds have the biggest bet on Sycamore.
Fund % Assets in Sycamore YTD Return
(BESLX) Berger Select 11.4% 0.1%
(POGSX) Pin Oak Aggressive Stock 4.2 50.7
(IPOSX) IPO Plus Aftermarket 3.5 3.6
(IPTAX) IDEX Pilgrim Baxter Technology 3 N/A
e-harmon Internet 3 N/A
(PBTCX) PBHG Technology & Communications 2.6 15
(TTECX) Turner Technology 2.6 46.1
(HGEAX) Heritage Growth Equity 2.4 16.4
(DTGRX) Dreyfus Premier Technology Growth 2.4 19.1
(BEMGX) Berger Mid Cap Growth 2.3 10.5
Source: Morningstar. Holdings as of most recent public portfolio. Performance figures through Aug. 22.

Sunderhuse and his colleagues at Berger are hardly the only Sycamore fans. Since the company has been public for less than a year and funds' portfolio data is typically dated it's not easy to measure fund ownership, but the early figures imply that a rising tide of believers roam fund companies' halls.

At the end of last year only 19 funds listed the stock on their books, according to Morningstar, but by July 31 that figure was up to 164. Fund titan Fidelity owns more Sycamore shares than any fund shop, according to bigdough.com, a Web site that tracks institutional stock ownership. (FMAGX) Fidelity Magellan , (FDFFX) Retirement Growth , (FSPTX) Select Technology , and (FSDCX) Select Developing Communications are the four funds that own the most Sycamore shares.



A Sycamore Grows in Mutual Funds
These funds haven't been shy about gobbling up Sycamore shares.
Fund Shares Bought Portfolio Date
(FMAGX) Fidelity Magellan 2,439,000 March 31
(PBTCX) PBHG Technology & Communications 561,000 March 31
(DTGRX) Dreyfus Premier Technology Growth 525,000 June 30
(VWVSX) Vanguard U.S. Growth 495,000 March 31
(VEXMX) Vanguard Extended Market Index 356,000 March 31
Source: Morningstar.

Why all the excitement? Phone companies are moving rapidly toward next-generation fiber-optical networks that allow them to offer customers Net access and data communications, in addition to standard voice communications. Sycamore is one of a handful of companies that sell the optical gear that these networks use to deliver this broader range of services more effectively.

Given the high demand for that expanded menu of services, Sycamore appears to be in a sweet spot.

"It seems like the optical networking trend is unstoppable right now and Sycamore is one of the leading players there. So, their fundamental growth prospects are pretty strong," says Jay Ritter, the Morningstar stock analyst who covers Sycamore.

Many money managers who fish in the tech-stock pond like the whole fiber-optical industry, which could lead the mercurial sector for some time.

"We're extremely bullish on the whole optical-networking market in general. Within technology you get these emerging markets. In the 1980s it was the PC makers and that's also when Microsoft came public. In the 1990s first it was networkers like Cisco and then the Internet companies like America Online and Yahoo!," says tech guru Bob Turner of Turner Funds. "We think this will dwarf those past trends because electrical networks will be replaced by fiber-optical networks. We could see up to a trillion dollars of spending." The stock is in each of Turner's large-cap portfolios.

And managers' excitement isn't limited to the long term; it covers Thursday's announcement, too.

"I expect them to handsomely beat their revenue expectations," says Jeff Wrona, who owns the stock in his (PBTCX) PBHG Technology & Communications fund.

Many stock pickers who own Sycamore admit it's hardly their only bet in the industry.

"At this stage the demand for optical-based systems is so high you don't have to differentiate between the tier one players like Corvis, Ciena, Juniper Networks, Redback Networks, ONI Systems, and Nortel Networks. Down the road you'll have to differentiate, but not yet," says Wrona, whose fund had a 5.3% position in Redback Networks and owns Sycamore today, though he declines to disclose how much of his fund is invested there. On March 31 he had a 2.6% Sycamore position.

But there's always a risk with any investment and there's some here despite the demand for fiber-optical networks and products that make them more effective. Though the company is broadening its customer base and product line, most of their revenue still comes from Williams Communications. So, if Williams gets a cold, some say, Sycamore could get pneumonia.

"One thing that could go wrong, is if the service providers like Williams stop spending so much on these next-generation networks," says PBHG's Wrona.

Another question is valuation. While the company is profitable -- earning 4 cents per share last quarter -- all this buying has left the company with a high valuation. Also, the analyst's rosy growth projections set a high bar -- a point even Berger's Sunderhuse makes.

"These companies have been so successful at beating expectations that I'm concerned with Wall St. analysts getting too greedy," he says.

While managers expect the company's earnings announcment to beat expectations, they're not sure the stock will move much since it's up 112.5% over the last 90 days. And if there's a dissappointment now or down the road, the stock could retrace its steps.

Perhaps the most ominous knock on the young stock is revered growth shop Janus' tepid interest thus far. On June 30 Janus was only the 41st largest institutional Sycamore shareholder, according to bigdough.com. On April 30 none of Janus' direct-sold retail funds owned a share, according to the firm's most recent shareholder report. At the same time they owned shares of several competitors like Redback and Nortel.



Trimming Sycamore
The funds selling Sycamore aren't dumping many shares.
Fund Shares Sold Portfolio Date
(MANTX) Merrill Lynch Internet Strategies 64,000 June 30
(HGEAX) Heritage Growth Equity 10,000 May 31
(HTEAX) Heritage Technology 9,000 June 30
(FRGDX) Dreyfus Founders Growth 5,000 March 31
(IPTAX) IDEX Pilgrim Baxter Technology 1,000 May 31
Source: Morningstar.

If Janus hasn't jumped on the Sycamore bandwagon -- and they may have done so since bigdough.com's June 30 data -- shareholders can take solace in the fact that those funds selling Sycamore shares have sold precious few.

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