NEW YORK (TheStreet) -- Shares of optical networking giant Ciena (CIEN) have been under pressure over the past six months. Since the stock hit a 2014 high of $25.38 in March, investors have seen more than 23% of their wealth disappear. But things are about to change.
The stock trades around $19.50. Ciena has ways to go to make up the 19% it has lost on the year to date, which trails the tech sector's 11% gain, according to Morningstar. So why is now the best time to buy a stock that has gotten beaten up for most of the year?
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Goldman Sachs analyst Kent Schofield believes the selling is overdone. Schofiled recently raised his rating on the stock to buy from neutral and slapped a $26 price target on the shares, which represents a premium of more than 34% from Wednesday's closing price.
Schofield's confidence is a bit surprising to most, especially since Ciena just released downbeat guidance for the current quarter, which sent the stock plummeting more than 7% last Friday.
Still, Schofield believes this quarter's slowdown will be "temporary in nature." Much of this optimism has to do with the recent uptick in Ciena's gross margins, which was a surprise since the company suffered margin compression in both the second and third quarters.
It's also worth noting that despite the downbeat guidance, Ciena did, in fact, post solid results, beating on both the top and bottom lines. That margins were able to expand suggests customers are willing to pay more, even amid weak spending periods. This shows that despite the threats that exist from Cisco (CSCO) and Juniper (JNPR) Ciena is not susceptible pricing pressure -- even from cheaper alternatives.
What's more, Ciena shares, which are trading at just 16 times next year's estimates, are cheap. Ciena is projected to earn $1.21 per share, according to Yahoo! Finance. Following a 12% jump in revenue and an upside surprise in gross margin, Ciena is well positioned to exceed its earnings projections, especially since analysts now expect carrier spending to rebound.
So while Wall Street is modeling for lowered expectations, Ciena's operational improvements, which contributed to the margin growth, will help offset near-term headwinds.