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This weekly feature is designed to take advantage of our stable of reporters and contributors, who will offer analysis of specific stocks from all angles -- fundamental vs. technical, short-term trader vs. long-term investor.
Today's subject, chosen by readers in a poll last week, is
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Stay Away From a Cyclical Play, by Steven Bulwa
Finisar, like other optical-component makers, has seen its shares skyrocket this year. It hit a low under $1 last August and has since more than quadrupled to $5. It is a bit of déjà vu all over again, as investors keep returning to this familiar group of names because of increased demand from telephone companies, which are rolling out "fiber to the premises" (FTTP) to offer products like video, raising the stakes in their battle against cable companies.
To the company's credit, it raised guidance in March and should return to profitability this year. Estimates are for a 20% increase in revenue next year. This is a better forecast than many of its peers --
is looking for revenue growth of 12% and
around 16%. Trouble is, the P/Es for these companies are still very high and the P/S multiples for cyclical component suppliers are also on the high side, around 5.
I wouldn't buy any of these stocks, especially given the significant recent increases in their stock prices. This is likely another short-term demand spike in a terminally cyclical sector. Prior to this year, Finisar had negative earnings for five straight years. I would be much more inclined to seek out a true growth story than try to decipher at what point in the cycle we are with these optical players.
Churning Would Be a Healthy Sign, by Dan Fitzpatrick
There is no denying the uptrend in Finisar. The stock has more than doubled this year, yet we've seen only a minimal pullback. At the same time, RSI remains at an extreme level. We see this persistent overbought character in very strong stocks.
The healthiest thing for bulls would be additional churning at this level, because it would indicate that demand for the stock is sufficiently strong to soak up all of the selling by holders who want to book profits. A close above $5 is indicative of strong demand, even at this relatively high price. That's why I'd be a buyer on a close above $5.
However, if the stock falls beneath the April low of around $4.25, I'd sell.
The Good and Bad Sides of Momentum, by Cody Willard
Finisar's finally turned the corner and become profitable. The company's got momentum now and the demand for many of its lines is strong and growing.
I've owned Finisar for a long time, and though I've sold it down pretty sharply since it got up around the $5 level, I remain bullish and long the name long term. In the near term, though, I think there are too many momo and fast-money longs, making this stock awfully tricky for now. Time frames matter.
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Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. At the time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email. At the time of publication, the firm in which Willard is a partner was net long Finisar, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.
He also produces a premium product for TheStreet.com called
The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns.None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback --
to send him an email.