Remember telecom? You know, that wacky group of stocks that was supposed to make us all wildly rich because every single man, woman and dog in the developed world would one day log onto the Internet simultaneously? Remember how all those people in India and China were supposed to go straight from rice-planting to instant messaging?

There were a hundred ways to play this idea: telephone carriers, switch makers, component makers, subcomponent makers, software makers and service providers. In the late '90s, we could recite the names of these leading companies like choirboys reciting a capitalist catechism.

Most of the zanier outliers of telecom's Class of '99 have met their makers. But a few hardware makers survived. The best ones shot up in value last year, but many have spent most of 2004 sinking straight back down.

Surviving the Bust

Let's spend a few moments looking at the most able of the walking wounded. Many of these stocks are deservedly 98% off their 2000 highs, but perhaps undeservedly 50% off their much lower January 2004 highs. Scarred but not dead, they represent ways to play a version of the '90s Big Vision that is slowly becoming rather real amid considerable skepticism.

Tops on the list is JDS Uniphase ( JDSU), the granddaddy of them all. Shares of this major maker of fiber-optic components fetched 27 cents, adjusted for splits, back in 1993 when the Internet was just a gleam in futurists' eyes. Ultimately, the stock rose as high as $153 in March 2000 when the hype was on high heat.

Then the line went dead. Shares sank to $1.96 again by October 2002, then rallied as high as $5.89 in January before sliding back to the mid-$3 range in recent days. So is the company fairly priced now, or is the stock poised for a return to pennies?

Strangely enough, JDS Uniphase shares are now compelling. Courtesy of the overbuilding of fiber-optic capacity back in the day, the company now has just one-fifth of its 2001 revenue, and revenue for the past nine months is still down over the prior nine months. And prices of the components it sells are still falling.

In its last earnings report, though, the company said spending by carriers on its type of equipment is finally improving. And it has survived the long, ugly postbubble period as practically the only fiber-component maker that can deliver almost any piece a fiber-optic switch maker wants to put in a new box.

Fit-With-Fiber Plays

The story to become excited about now with fiber-optic suppliers is fiber to the premises. It's about the only way that Baby Bells like SBC Communications ( SBC) and Verizon ( VZ) can battle back against the onslaught of cable companies that have pushed television, broadband Internet and telephone service to residential customers nationwide, aiming to shoulder the Bells out of their traditional business with low-cost plans.

The Bells are in a pickle because Internet-based phone service -- voice-over-Internet protocol -- is far cheaper than the switch-based phone service into which they've sunk a century's worth of infrastructure spending. More and more, customers are accepting the cable companies' pitch and ditching the phone company.

Baby Bells' answer to this death knell is the prospect of far faster Internet broadband and video/television delivery over fiber-optic lines. Currently, the phone company's broadband solution, digital subscriber line, maxes out at roughly 1.5 megabits per second, though typical speed is around 768 kilobits. That's generally a bit faster than cable speeds. But fiber optics will boost the speed as high as 100 megabits per second, which is fast enough to make speed concerns a memory. It'll be nothing to download a feature film. You'll be skating on air. Cable can't match it.

There is plenty of fiber-optic capacity in every major U.S. city. The problem is the cost of digging up roads to drag it from major routes to the streets where people live. Until now, the Bells have been reluctant to foot this cost. But recent indications of a positive regulatory stance from the FCC, plus pure desperation, have finally pushed them forward.

In Verizon's earnings releases recently, the company has shouted to a skeptical world that it has begun the process. Analysts at The Yankee Group believe it. They recently estimated that Verizon will pass more than 350,000 customers by the end of 2004 with fiber-optics capacity, and in five years it expects deployment to reach 6 million homes, apartments and businesses -- generating $3 billion in revenue.

With Verizon leading the way, fiber to the premises will help the Bells keep their heads above water, but the phone companies are probably not the investment play. Possibly the best equity play is the beaten-up makers of the components that pump and multiplex the laser beams along the route from a carrier's central office toward the home.

JDS Uniphase, at $3.31, is probably the main name to watch, but also consider photonic-processing component maker Avanex ( AVNX), now selling for $3.05 per share. A month ago, it would have made sense to recommend switch maker Advanced Fiber Communications ( AFCI), but it was scooped up by Tellabs ( TLAB) in a fiber-to-the-premises play of its own.

FA Asset Management value manager John LaForge, a big fan of both JDS Uniphase and Avanex, said their business probably won't pick up for two quarters, but by then the story will be better known and prices will be higher. "Business is turning for these guys, and no one wants to hear it," he said. "They'll want to own it when it pops to $5, but down here they think it's a problem. They're wrong. There is no problem. Earnings have come in line two quarters in a row now, and they've guided up 5% each time."

Two More to Dig Into

Last week, trade publication NetworkWorldFusion reported that Verizon was halfway done with the buildout of fiber to the premises in one of its first markets: Keller, Texas, a city of 25,000. It reported that the fiber has been strung along aerial cables and in underground conduits, and buried in the ground through the suburb's neighborhood at a cost of $1,000 to $1,500 per home.

All that digging and climbing has meant new work for a low-tech beneficiary of the last fiber boom: construction companies. There used to be dozens of these sorts of outfits, but the telecom bust has left just a few standing -- most notably Dycom ( DY) and MasTec ( MTZ).

Dycom is a very good company, which said it was rolling out two fiber-to-the-premises cities for Verizon this quarter and had four on the books for next quarter. But MasTec is more interesting for speculators at its current price near $4.16.

MasTec spent many years rolling up competitors, but never invested in a computer system that would tie all its parts together. The company paid for that recently when it failed to file its 2003 annual report and first-quarter 2004 financial report with the Securities and Exchange Commission, and said it would have to both restate earnings and renegotiate loan covenants.

LaForge, who specializes in what he calls "broken stocks," said that if the 10-Q is "messy but not horrible," the stock could go to $6 in short order after it is filed.

But he said he would double down if it went to $3 as the problems look worse than they are, and, in any case, at that price almost any scenario -- short of bankruptcy -- would be discounted.

Like most cool telecommunications ideas, this one is sure to be slower to get off the ground than advocates want. But the difference for investors now is that some of the key stocks are pretty cheap, so the investment risks, while high, are not outrageous.

Strong Fiber Plays
Watch these stocks
Company June 2 Close 52-Week High 52-Week Low Market Cap
JDS Uniphase (JDSU:Nasdaq) $3.31 $5.88 $2.60 $4.7 billion
Avanex (AVNX:Nasdaq) 3.05 7.57 2.70 427 million
MasTec (MTZ:NYSE) 4.11 16.50 3.63 202 million
Bigger FTTP Plays
Dycom Industries (DY:NYSE) 24.94 29.80 13.70 1.2 billion
Verizon (VZ:NYSE) 35.18 41.35 31.10 98 billion
Source: MSN Money


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Avanex and MasTec to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdmmail@fastmail.fm. At the time of publication, Markman had no position in securities mentioned in this column.

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