Ciena Recovers After Summer Swoon

Posted Sep 15th 2010 2:00PM by Joseph Lazzaro
Filed under: Ciena Corp (CIEN), Stocks to Buy

It's been a tumultuous summer for the stock of broadband/bandwidth play Ciena Corp (CIEN), first discussed here on May 19, 2009, at a price of $11.27. Here's hoping you held on to your shares.

The reason? After staging an impressive rally in the first half of 2010 -- one where the stock roughly doubled from about $10.40 to $19.60, the shares swooned this summer, and gave back almost the entire gain, falling to about $11.55.

A 10% correction would have been normal; a 40% pull-back, is not, and CIEN's extended dip below the key, 50-day moving average also was a concern.

Still, the stock held support well above $10, and the recent surge back above the 50-day MA is encouraging.

Concerning fundamentals, Ciena remains on-track to post a roughly 100% revenue increase, including results stemming from its pending $521 million acquisition of Nortel's Metro Ethernet Networking business.

Further, Ciena's diverse client list and a roughly 40% international sales mix add to the positive story. In addition, the fact that communications giant AT&T (T) accounts for 20% of sales adds an element of revenue stability. (Ma Bell isn;t going away any time soon.) To be sure, a slower-than-expected rebound in telecom spending would weigh on Ciena's revenue, but the calculation here is that, at least regarding the telecom sector, the U.S. and global recovery is proceeding on schedule.

The First Call FY2010/FY2011 EPS estimates for CEIN are a loss of 51 cents to a profit of 42 cents.

2010 Outlook: I view Ciena as a long-term play, but if investors are looking to sell CIEN within the year, it's probably best to take your profits after it rises to $19 or $20, if it fails to clear $21.

Stock Analysis: I consider Ciena Corp. to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in CIEN now, then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 75% of my CIEN position before November 2010, and I'd put a sell/stop loss at $9.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.