What a difference a couple of weeks makes. Less than three weeks ago the optical component sector was the pariah of the investment world. Every where you looked you saw/heard a guru/swami/pundit/kindly uncle/boo-bird out there warning investors to stay away from the sector if not outright short the players in the sector.
You had stocks like Applied Optoelectronics trading in the mid-forties, Oclaro went down into the $6 and change range, and Lumentum got as low as $40 per share as investors bailed on the sector en masse.
The reasoning put forth was the usual nonsense about business in China (datacenter and 100G buildout) falling off a cliff and that it was "head for the hills" time which is their usual rallying cry for the last decade or so.
Fast forward to yesterday and Applied had rallied to a close of $71.24 per share, Oclaro closed at $9.37 per share and Lumentum ended the day at $57.35 per share.
Hmm, 50% in less than three weeks. Not shabby. no?
So, what changed?
Basically, Street analysts suddenly changed their gloomy tune on demand from China and started highlighting a recovery in demand from that country.
First at bat, was a note from Needham that talked about China Mobile awarding ZTE as the primary vendor to build out its packet transport network with Huawei as the secondary. Oclaro is the beneficiary of that vendor win by ZTE given that the former gets at least 10% of its revenues from the latter. The analyst added that he expects tender win announcements from China Telecom and China Unicom as well in the second half of the year. Most important, he concluded that the pause in spending in China was temporary and that the underlying catalysts remain in place.
Then came a note from Rosenblatt that declared that China Telecom provincial upgrades were completed and that work had begun on their metro plan. The analyst added that he expects the 2017 100G upgrade cycle to be even bigger than the one seen last year.
This was followed by Needham that started Applied Optoelectronics with a Strong Buy and a $85 per share price target. The analyst said that he saw "substantial upside" to his earnings forecast and that he expects very strong demand driven growth for the next few years.
That was it. Set fire to the sector.
I expect more fireworks in the sector in the coming weeks.
These companies were absolute steals a couple of weeks ago and are still cheap given the massive demand expected down the line, short-term and long.
Words to the wise.
(Long aaoi, oclr, acia, long and short options in all three)