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Funds Don't Expect Great Things From Lucent

Growth funds have sold off in droves.

The story of

Lucent Technologies

(LU)

in recent months has been a tale of woe, and many fund managers aren't sticking around to hear the ending.

Just 12 months ago, the mammoth communications network shop's shares were a "must own," according to many growth fund managers. They saw the vast upgrade and expansion of the world's communications networks as giving Lucent a unique growth opportunity.

But this year the company has stumbled, missing a product cycle in its fiber-optic networking business, disappointing customers and investors, and undergoing a management

overhaul. More nimble competitors have stolen market share and droves of fed-up growth fund managers and investors have dumped their sagging Lucent shares. Meanwhile, Lucent has started to show up on the radar screens of some

value managers who frequently pick through the market's dustbin.

The upshot: If you own shares of growth funds you probably don't have Lucent to kick around anymore. If you own Lucent shares, the pros don't expect the stock, down more than 40% this year, to head north anytime soon.

"I can't think of a scenario where

Lucent's stock will come back," says Robert Loest, whose

(IPSMX)

IPS Millennium fund focuses on the network "connectivity" theme. His funds, which held

AT&T

(T) - Get AT&T Inc. Report

, got Lucent shares when AT&T spun it off in 1996. He sold the last of his Lucent stake on Feb. 18. "I haven't gone back and I don't plan to," he says.

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For its part, Lucent says its taking steps to regain investors' confidence.

"We're making spinoffs and strategic acquisitions to bolster our efforts and we've also added key personnel like (new chief financial officer) Debbie Hopkins and we're currently searching for a new chief operating officer. We think these actions will help us get past the execution issues we've had in the past," says Lucent spokesman Bill Price.

But Loest is far from alone, as these stark numbers illustrate. In the second quarter, March 31 to June 30, the number of

large-cap growth funds owning Lucent shares tumbled from 399 to 177, according to

Morningstar

. At the same time, technology sector fund managers were fleeing too. In the second quarter the number of tech funds owning Lucent shares fell from 92 funds to 52.

Talk is cheap on Wall Street, and the true measures of portfolio managers' tastes are their buy and sell decisions, so this exodus is not good news for Lucent lovers. These figures are particularly damning when you consider that the large-cap growth and tech fund managers typically specialize in companies like Lucent, and though the number of funds in both categories rose in the second quarter, the number of Lucent believers dropped precipitously.

Optimists might cling to the fact that the average large-cap growth fund had 0.8% of its assets invested in Lucent, but that's an underweighting since the stock makes up about 1.5% of the

S&P 500 Index. It's also half the weighting the average big-cap growth fund sported on June 30 last year.

On Jan. 1, large-cap growth funds held more than 126 million Lucent shares and on June 30 that was down to a bit more than 28 million. On June 30 last year tech fund managers owned 13.8 million Lucent shares. A year later they held 6.1 million, with the stock comprising just 0.5% of the average tech fund's assets. That's down from a peak weighting of 1.6%, during the last eight quarters.

"We're one of the exiters," says Don Luskin, who bought Lucent when his

(OPENX)

OpenFund launched a year ago, but sold just prior to Jan. 6, when Lucent warned Wall St. that a first-quarter earnings

shortfall was coming. On that news, Lucent dropped from 72.50 to 52.50. "It wasn't any inside information or brilliant idea that made us sell. It just seemed to me their AT&T gene pool had caught up with them. They seem to have a hard time executing," he says.

When Lucent was spun out from parent AT&T in 1996, growth managers licked their chops. The massive firm's products and services connect and route voice and data communications. In an increasingly connected world, that sounded like the proverbial sweet spot. Many pros bought shares hand over fist, figuring the world's communications networks were due for vast remodeling and Lucent would be play the role of

Home Depot

.

"There was a while there when everybody thought Lucent was the next great growth company," says Luskin.

But things haven't worked out that well.

Nortel Networks

(NT)

, a key Lucent competitor based in Canada, quickly recognized the outsize demand for fiber-optic networks to connect individuals and businesses to the Internet quickly, reliably and efficiently. Though still a big player, Lucent has often been outrun, losing market share to Nortel and other more nimble competitors. After guiding analysts earnings expectations

down this year and for the next fiscal year, money managers have voted with their feet.

"A year ago everybody thought this was a 'must-own' stock, but at this point it's a 'prove-it' stock," says Jay Ritter, the Morningstar analyst who covers Lucent. "They've lost ground in the high-end optical networking area to Nortel, plus the recent quarterly results and outlook were very disappointing. They have to prove they can deliver (results) and regain some ground." Ritter and others also point to Lucent's

loss of many engineers to competitors as another serious problem.

The good news, of sorts, is that some value-oriented managers are now sniffing at Lucent. Value managers typically focus on slower growing industries like financials and utilities, often favoring profoundly battered tech stocks when they venture into the mercurial sector.

"I'm a value investor, so I'm looking for good companies on sale," says Tim Quinlisk, whose

(TAGRX) - Get JHancock Fundmntl Large Cap Core A Report

John Hancock Large Cap Value fund had Lucent in its top-five holdings with a 3.5% weighting at the end of July. "I like Lucent because I think it's significantly undervalued. I have a mid-70s price target based just on the company's break-up value."

Interestingly, Kevin Landis, one of the most highly regarded tech fund managers out there, owns Lucent shares in his

(TLFQX)

Firsthand Technology Leaders fund. Firsthand's funds bought more than 737,000 Lucent shares in the second quarter, according to

bigdough.com, a Web site that tracks institutional stock ownership. Firsthand officials didn't return a call for comment.

Morningstar's Ritter and Hancock's Quinlisk both say the bar is now low enough that Lucent should be able to meet or beat analysts' expectations over the next two quarters. If so, growth managers might trickle back into the stock. They also say the upcoming spinoff of some business units could help the firm refocus and

retain key personnel.

But there's little evidence of much enthusiasm among the growth crowd. Many of the stock's largest institutional holders are index-fund specialists like

Barclays

and

Vanguard

that have to own it because of it's still a big part of many indices like the

S&P 500

. Nonindexer

Fidelity

, the second-largest Lucent shareholder on June 30, sold more than eight million shares in the second quarter, according to bigdough.com. And

Janus Capital

, one of the most successful growth managers in recent memory, wasn't among Lucent's top 150 institutional shareholders on June 30.

"Nortel seems to be doing a lot better. If you're going to own one of these companies, you should own Nortel," says Loest.

Today the number of funds owning Nortel shares outnumber Lucent holders 795 to 773, according to Morningstar.

Staff Reporter Scott Moritz and Editorial Intern Sarah Rubenstein contributed to this article.