Anytime anyone utters the words "China slowdown," companies that have just about any exposure to China fall into a swoon as investors head for the hills only to come back a day or two later and buy those same shares at higher prices as calmer minds prevail. No sector swoons harder than the optical component complex, which includes great (albeit smallish) growth companies like Applied Optoelectronics, Oclaro and Lumentum, just to name a few.
We saw that head-for-the-hills effect in full action late week before last (June 15, 2017) when Finisar reported numbers that, at face value (based on the earnings press release,) were a take-down on current guidance going into the earnings report. Shares dropped about 4 to 5% off the headline print and then ended the next day higher by around 7 to 8%, costing the said head-for-the-hills crowd a cool 10% overnight. Incidentally, if one had taken advantage of the post-earnings print knee-jerk swoon on June 15, he or she would be up a nice 15% in slightly more than a week.
Not too shabby, huh?
The issue is the fact that most investors in the optical component complex are not aware or get caught up in the "China slowdown" talk mostly prompted and pushed by the financial media and by the darksiders. What they will rarely mention is the fact that a slowdown in China means going from 7% plus GDP growth to 6.5% GDP growth which is still mammoth growth given the size of the Chinese economy.
Most importantly, the optical component complex is a lot more than just a China growth story. In addition, almost every single company that deals with China in the optical component sector has stated emphatically that they see growth in that part of the world resuming in the second half off this year.
The second half of this year is upon us despite the sweaty-palmed hand-wringing and noisy shouting from the darksiders about optical sector this and optical sector that.
Let's play devil's advocate here and say the Chinese metro and DCI build-out stops. Even if that scenario were to occur, there is still enough demand for the above-mentioned companies in the commercial markets, the 3-D sensor market, the DSP (digital sensor processor) market, the optical switching market and the market for DCI and metro build-out here at home and in the rest of the West as well, to still strong revenue growth going forward.
Of course, the question remains whether investors recognize the opportunity in front of them right now or will they see it like they did with Finisar 15% or so higher or maybe even at levels higher than that?
Shares of Applied Optoelectronics closed on Friday, June 23, 2017, at $65.87 per share, up $2.29 while shares of Lumentum and Oclaro closed at $64.00 per share and $10.01 per share, up $1.55 and $0.57 respectively.
Interested investors could also take a look at DA Davidson initiating coverage report from June 23, 2017 on the three stocks mentioned in this article for further validation of my thesis.
(Long aaoi, oclr, long and short options in both)