No. of Recommendations: 2
On December 12, 2007, I put a bunch of optical stocks in a tracking port at Yahoo. The networking sector had been hammered, and I knew optical stocks would come back one day. I just didn’t know which stock was going to take off. So I listed a bunch of names and gave each one an imaginary $10,000.

Yesterday, after three years, I took a look at it.

My Finisar stock is now worth a mythical $177,000. I missed a 17-bagger, damn it.

So now I want Finisar. Of course, I do not actually know what Finisar does in any sort of specific, scientific detail. “Makes the internet go faster.” That’s the sum of my science. I do know enough to pretend that I have knowledge. “Our reconfigurable optical add/drop multiplexer is kicking ass. And JDSU sucks.” I can talk optical trash. The problem is I don’t really understand what I am saying.

All I really know is 17-bagger, 17-bagger, I missed a frickin’ 17-bagger.

On the other hand, I have seen the financials. Nice!

After years of flat or declining sales, by 2009 revenues climbed up from $440 million to $497 million. In 2010 they went up 25%. So the revenues are increasing, and the rate of increase is increasing, too. From June to October, Finisar would have a half billion in sales in six months, which is more revenues than in all of 2008.

The recent profit growth is even more insane.

After two unprofitable years in a row, the company squeaked out $14 million dollars for 2009. Profit margins were a miniscule 2.5%. And then they started smacking the ball.

August, 2010: $19 million in earnings, profit margins 10%.
October, 2010: $33 million in earnings, profit margins 14%.

Think about that growth for a second. Q2 is up 75% from Q1. When optical stocks start doing numbers like that, look out.

Two months ago, Wall Street was forecasting that Finisar’s profits would start to go down in Q3. Last month they raised their estimates, saying that profits would be flat in Q3. Last week they raised their estimates again, saying that profits would slightly increase.

I might not know what a reconfigurable optical add/drop multiplexer is, but I know a silly estimate when I hear one. In the last four quarters Finisar has beat the street by 6%, 10%, 34% and 15%.

But let’s suppose the Street is right. Even Wall Street’s most curmudgeonly estimate has Finisar making $127 million in profit by April 2011. So let’s look at those numbers again.

April 2008, unprofitable
April 2009, unprofitable
April 2010, $14 million
April 2011, $127 million

Whoa, dude, I’m blind!

Right now Mr. Market is giving Finisar a p/e of 31. If you multiply 31 times that skimpy $127 million forecast, this gives Finisar a market cap of $3.8 billion by April of this year. Or 60% higher in four months. I can’t do the math on that, but I think it’s a pretty nice annualized return. It might be 180%.

I know, I know, I should learn science (and math) before I buy any optical stocks. Yeah, yeah. Optical stocks are back, baby. Wavelength selectable switches, yes!

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When Life Gives You Lemons
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