Mad Dash to Nasdaq: Ciena Finds It's Hard to Make Enemies

The networking supplier found itself alone last year after a merger blew up, but investors seem to have forgotten.
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It doesn't pay to hold a grudge in this market.

Ciena

(CIEN) - Get Report

has quadrupled this year and is up 73% in the last month, closing down 3/16 at 59 7/8 Wednesday. Tuesday it gained 11 1/2, or 24%, to 60 1/16 after the London-based carrier

iaxis

expanded its plans to deploy Ciena's new optical network systems.

Ciena's jump is but one chapter in the bizarre tale of rising tech stocks, particularly those with telecommunications appeal. The

Nasdaq Composite Index

has surged some 80% in 12 months, adding $2 trillion in market capitalization to the stock market's primary tech benchmark. In the last month it's up more than 20%, setting record after record as investors pile into stocks that promise to take part in building the next century's evolving information infrastructure.

Riches to Rags

Ciena is more like a phoenix than other Net darlings, because of a failed merger with

Tellabs

(TLAB)

in the summer of 1998 and the onset of

competition from large suppliers. Ciena's fundamental picture has brightened, thanks to recent acquisitions, but perhaps not enough to justify the near-doubling of its stock in one month. Shares also have been driven by stubborn investor optimism about all things telecom, particularly among retail investors with little memory of prior disappointments. In fact, renewed speculation of a takeout might lure back professionals who were burned in the Tellabs disaster.

Dash down some thoughts on our Nasdaq board

JDSU

Ciena is rising because "bandwidth is one of the favorite themes on Wall Street," says Eric Efron, co-manager of the

(USAUX) - Get Report

USAA Aggressive Growth Fund, which has owned Ciena since its initial public offering in early 1997. Efron isn't buying lately, and says retail investors might be playing a role in the recent bonanza.

The

Island

electronic network of primarily retail investors accounted for 8% of trading volume in Ciena in October, more than any other firm -- and twice as much as Ciena's white-shoe underwriter,

Goldman Sachs

. That's according to the most recent data from Nasdaq.

Turning It Around

The turnaround story is improving. Ciena increased revenue 16% to $128.8 million in the quarter ended July from $111.5 million in the prior quarter. That figure's roughly flat with revenue one year earlier. Net income excluding acquisition costs was $1.5 million, or 1 penny per share, roughly flat with the prior quarter but down from $13.8 million, or 10 cents per share, a year earlier. Ciena says it is developing higher-margin optical products through its acquired units

Omnia Communications

and

Lightera Networks

.

Investors are realizing "they've got a complete switching solution," says Ned Brines, portfolio manager with

Roger Engemann & Associates

, owner of Ciena since the spring.

In September 1998 Ciena and Tellabs canceled their planned merger after Ciena lost a prospective

contract with

AT&T

(T) - Get Report

. Ciena plunged to 9 from 90 in less than three months. The debacle ranked as "one of the biggest losses of the year" among arbitragers who invest in mergers, according to one arb involved in the deal.

"They had no friends," Efron says of Ciena. But he paid a visit to Ciena's executives that same month, and started buying additional shares, reasoning that even as a standalone the company would keep growing with its market.

Ciena stock has recovered nearly two-thirds of its prior value. It still trades on constant rumors about coming contracts, such as its ongoing field tests with the carrier

Williams Communications

(WCG) - Get Report

, says Daniel McKelvey, money manager with

FC Partners

in San Mateo, Calif. He recently "punched out" out of Ciena and poured the cash into

JDS Uniphase

(JDSU)

, which he says holds a more steady competitive position.

"I think there's speculation of another deal coming," says the arbitrager. "Arbs would definitely play."