Companies such as Lucent Technologies ( LU), JDSU ( JDSU) and Vitesse Semiconductor ( VTSS) -- all still-struggling survivors of the great tech wreck of 2000 -- have turned so many corners their stocks should be on wheels. Over the last five years and counting, each pickup in sales has been a momentary blip followed by another collapse in growth. Each reorganization has promised a return to black ink from red, but each has been followed by another wave of cost-cutting as revenue continued to decline. So it's with trepidation that I say this, but right now I think the stocks of five of these companies, each selling for way less than $5, are solid speculative buys. They're cheap. They'll soon have the wind of the end-of-the-year technology rally at their backs. And -- here's the wild part -- I think there are signs of real and sustainable improvement. These stocks aren't for the weak of heart, and remember, a $3 stock can still cost you half your money if it drops to $1.50. But balancing that risk, I think investors stand a reasonable chance at getting a double out of these five stocks by year-end. The stocks? Lucent Technologies, JDSU, Vitesse Semiconductor, Conexant Systems ( CNXT) and Anadigics ( ANAD).
Lucent, along with Nortel Networks ( NT), is a major supplier of infrastructure for Sprint's wireless network. About 70% of Lucent's recent sales come from wireless equipment and services, and the company has built up a 50% share of the third-generation wireless capital spending commitments made by U.S. wireless companies. The other four stocks on this list fit well into this general paradigm.
The timing problem is one that JDSU created with its Sept. 23 announcement that it would seek approval at its December shareholder meeting for a reverse split of its stock. Unlike the usual stock split, which gives an investor more shares -- perhaps two for every one -- at a proportionately lower price, a reverse split results in an investor holding fewer shares at a proportionately higher price. The company has proposed either a 1-to-8 or 1-to-10 reverse split. In theory, companies do reverse splits to raise the visibility of their stock -- more analysts will cover a $20 stock than a $2 stock -- and to increase institutional ownership of the shares -- some institutional money managers are prohibited from owning shares below a certain price. So, in theory, a reverse split would give JDSU stock more visibility, greater ownership and a higher price. But there's a good chance this reverse split won't work like that. First, JDSU already has tremendous analyst coverage left over from when its shares traded at $147 back in March 2000. Zacks Investment Research lists nine analysts who have made earnings estimates for the September quarter. Second, the reverse split has already put the stock on the institutional radar screen and set it running. The shares were up 14% from Sept. 23 through Sept. 30. Everybody from Jim Cramer on CNBC to Citibank is now recommending the stock. There's a good chance, as Michael Murphy argues in the Sept. 29 issue of his New World Investor newsletter, that the stock will run up through the December shareholder meeting and then decline after the reverse split is approved by shareholders -- if it is -- as institutions and professional traders sell. See why the timing might be tricky? You can either buy this one now -- the sooner the better -- and ride the surge with the idea of selling into the news of the actual vote, or wait for any post-split-vote pullback. If you're a trader with the experience to know that you'll be able to pull the trigger on the sell when the time comes, the former is probably the better strategy. If you tend to fall in love with stocks and have difficulty trading them, I'd suggest that you look elsewhere for your profits in any fall technology rally. And never fear. I'll have a column on less risky, non-$5 technology stocks -- you know, the kind with actual earnings -- in a few weeks. Just in time to catch the mid-October window that has historically been the best time to buy for any end-of-the-year rally.