New Momentum King Gets Fit With Fiber - TheStreet

You can't say Mark Blodgett didn't warn us. From last summer through winter, the sunny chairman of benighted lighting manufacturer

StockerYale

(STKR)

was buying thousands of shares of his firm at prices as low as 42 cents a share in the open market -- more than 80% off the high they had set two years before.

Nine months later, the stock has ridden the mania for fiber-optic components stocks to the top of the market, racking up a 4,600% advance in the year to date, a figure that's more than four times better than the new millennium's next-best momentum stock.

The remarkable journey from basement to penthouse for StockerYale -- which recorded just $14 million in sales over the past 12 months, and a net loss of $1 million -- symbolizes the insatiable demand today for shares of component makers in the fast-growing fiber-optic communications infrastructure space. To many observers, this all looks much like the frenzy for Internet stocks a year ago, but with one key difference: "The end opportunity is visible, real and understandable, and that is the contrast from the dot-com craze," says portfolio manager Peter Conrad, of

Kopp Investment Advisors

in Minneapolis. "Plus there is not an exponential increase in supply because a lot of the companies are being bought up."

Under the Radar in '99

The opportunity for StockerYale at this time last year was certainly not visible to the naked eye. The New Hampshire company had modestly prospered during the Cold War as a manufacturer of watches and compasses for the U.S. military, as well as a maker of machine-tool fluorescent lighting systems. But not long after Blodgett quit his corporate finance job on Wall Street in 1989 and took the firm private in a highly leveraged buyout, the picture went dark. The suddenly shrinking Pentagon began to cut back its orders, and bank loan officers became edgy.

In an interview, Blodgett said he spent most of the '90s digging the firm out of debt. In 1996, he took the firm public again via a reverse merger with a tiny Canadian company, and used the shares and spare cash flow to acquire cheap fiber-optic assets to augment his illumination business. His first purchase was a small Canadian laser maker that was a world leader in manufacturing phase masks, a critical piece in the creation of fiber Bragg gratings (the brilliant component that turns a single beam of light into many, and which has been the engine of the recent optical networking revolution). His second purchase was six fiber "drawing towers" from a retrenching German glass manufacturer.

Blodgett's dreams were slow to pay off, however, and his stock shattered like crystal dropped on concrete. By June 1999, StockerYale failed to meet two of the

Nasdaq Composite Index's

three listing requirements: minimum market capitalization and net income. To keep the business afloat, Blodgett decided to kick away his last prop -- the tangible assets represented by a machine-tool plant -- and suffered the humiliation of being delisted from the exchange. On Dec. 30, his largest institutional shareholder dumped thousands of shares on the market, and the stock hit a low of 39 cents a share in Bulletin Board trading.

All this time, Blodgett was a buyer, he said, "because I recognized we were totally undervalued. The market didn't realize that we were a player in phase masks, and that we had more fiber-optic products coming." In January, the firm announced that its Canadian subsidiary,

Lasiris

, had invented and begun selling a phase mask that was light years ahead of competitors -- and the stock jumped 557% in three weeks. In February,

Bloomberg

reclassified StockerYale as a fiber-optic components maker, and traders looking for the next big idea in the optical networking food chain apparently deemed it a value play, an event that conspired with other factors to send shares up

another 400%

in three weeks.

The stock is only up another 80% since March, when it regained its Nasdaq listing, but the research director at a large money-management firm that has owned the company's equity for half a decade said he is not inclined to sell out yet. One reason: Consolidation in the industry has swelled the buying power of phase-mask and fiber clients like

JDS Uniphase

(JDSU)

,

Corning

(GLW) - Get Report

and

Alcatel

( ALA).

"StockerYale's customer base is very high-quality, and as they ramp up their capabilities they'll be doing a lot more business," said the manager, who declined to be named. A portfolio manager at

Trainer Wortham

, a New York fund that reported holding 212,000 shares in its June 30 report to the

Securities and Exchange Commission

, likewise declined to be named but said he thinks "It's a good long-term story."

On Wall Street, "long term" can last about 30 minutes if a company doesn't deliver the goods, but StockerYale has finally begun to show respectable sales growth. Net sales were $10.4 million in the six months ended June 30, up 53% from the comparable 1999 period. The increase was largely due to higher sales of laser and optical products as well as some increase in sales of machine-vision lights. Blodgett says that the firm has an impressive 150,000 square feet of manufacturing space in which to expand operations, and that the firm's next big growth phase will stem from its specialization in making high-end fiber used inside optical network equipment. The two main manufacturers of this photosensitive, or erbium-doped, cable today are

Lucent Technologies

( LU) and Corning, and they can barely meet their own demand for it, with little left over for competitors.

A Buy For the Risk Taker

So is it a buy? Only for extreme risk takers as part of a diverse portfolio, and even then with a tight stop. Chrystyna Bedrij, an analyst at

Griffin Securities

in New York, said that StockerYale primarily benefits from "hot sector overflow" -- the phenomenon of too much money chasing too few stocks. "Investors are awed by the size of the market opportunity and confounded by the shortage of viable public investment vehicles," she said.

The most likely endgame, most analysts agree, is a merger with a much larger components player. JDS Uniphase, Corning, Lucent and

ADC Telecommunications

( ADCT) have been gobbling up smaller manufacturers left and right with prices at staggering multiples to revenue as they each race to become a one-stop shop for end users like

Nortel Networks

( NT),

Cisco Systems

(CSCO) - Get Report

and

Ciena

(CIEN) - Get Report

.

But Blodgett, who owns 48% of the firm's roughly 8 million shares, says he plans to forge ahead with new products and has no plans to sell out yet. He says that

SDL

( SDLI) was a sleepy manufacturer of industrial laser pumps in 1998, poking along with a market cap of around $300 million. It's advanced about 10,000% since then and agreed to a $41 billion merger with JDS Uniphase. The market for phase masks and specialty fiber is nowhere near the size of SDL's market, but there's no telling how far emotional investors will push these names. After all,

Corvis

(CORV) - Get Report

already has a market cap today larger than

General Motors

(GM) - Get Report

, and it has yet to record substantial revenue;

New Focus

( NUFO) has a market cap of $8 billion on trailing 12-month sales of $18 million; and

LightPath Technologies

(LPTH) - Get Report

, has a market cap of $937 million on $1 million in annual sales.

"If you thought investors were nuts last fall with Internet stocks, wait until you see what happens this year with these opticals," said Terry Bedford, a fund manager in Toronto who's skeptical of the industry's fundamentals but willing to make a buck on the euphoria. "Just make sure you learn the lesson of March and April, and don't get left holding the bag when the bubble bursts."

At the time of publication, Jon Markman owned or controlled shares in the following equities named in this column or listed in the SuperModels portfolios: ADC Telecommunications, Amdocs, BEA Systems, Cisco Systems, EMC, JDS Uniphase, Kopin, Maxygen, Microsoft, Nokia, Nortel Networks, Oracle, Qualcomm, Siebel Systems, Superconductor Technologies and Xcelera.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He welcomes your feedback at

mctsc@microsoft.com.

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