Sycamore Stands Tall as Buyout Talk Sprouts

Buyers were coming out of the woods Monday for

Sycamore

(SCMR)

.

The optical networking gearmaker, once among the most revered of the optical networking start-ups, has suffered through a long string of disappointments. It all too publicly lost an

AT&T

contract to

Ciena

(CIEN) - Get Report

, then was ridiculed for

defying old-line certification requirements. Finally, investors dumped the stock en masse when phone companies stopped buying fancy optical gear.

But now at least one analyst thinks the optical networking gearmaker is ready to shake off the last year's blight. Citing a potential for new contracts and perhaps a buyout by a bigger player eager to get its hands on new tech, Lehman Brothers analyst Steve Levy

upgraded Sycamore to strong buy from neutral Monday.

The warm words caused the stock to jump 56 cents, or 16%, to $4 Monday. With the pervasive gloom in telecom hanging over the stock, Sycamore has been trading near its all-time low of $3 for the past few months, down from a 52-week high of $12.60 last summer and an all-time high north of $150 shortly after its IPO in late 1999.

Levy talks up the stock using all the fundamental tools you would expect. The company has plenty of cash, $4.27 per share. Its gear is in several trials with customers. As the dust settles from customer collapses, Sycamore's sales outlook seems to have stabilized at about $20 million per quarter. Levy points out that any new contract will likely have a big impact on such a small base.

But as is often the case in would-be turnaround stories of this sort, perhaps Levy's most compelling argument is the one no one can find any evidence of: that Sycamore may get bought by a rival. Industry observers point to German electronics giant

Siemens

(SI) - Get Report

as a potential buyer. Sycamore CEO Dan Smith is on the board of Westford, Mass.-based Unisphere, a Siemens subsidiary.

Sycamore says that as a policy, it doesn't comment on speculation.

A few networking investors weren't taking the bait. With demand for optical gear still on the decline, Sycamore isn't a compelling investment, two hedge fund managers said.

One possible reason for the stock's immediate rise is that some investors who had short positions -- borrowed stocks with the hope they fall in value -- chose to cover their investment and started buying the stock at the market value.

But considering the stock's recent history, Sycamore holders will surely take a 16% gain when they can get it.