Local Telecom Stocks Reconnect With Investors

By Jerry Knight
Monday, April 3, 2006

Looking at the list of Washington's best-performing stocks for the first quarter, you'd think it was 1999 all over again.

Telecommunications -- the Washington area's fastest-growing industry before the tech stock bubble burst -- turned hot again after five years in the freezer.

The rebound produced gains of 50 percent and more for long-suffering shareholders of local communications equipment makers Optelecom-NKF Inc. and Ciena Corp., and network operators Cogent Communications Group Inc. and XO Holdings Inc.

Strong as those stocks were, all but Cogent came with memories of the bad old days when investors were bidding up telecom stocks with little regard to the realities of their business.

Ciena, whose shares gained 75 percent in the past three months, is rated "hold" or "sell" by 22 of the 24 analysts who follow it. Though the stock, which hit a two-year high during the quarter, is trading at $5.21, the overwhelming majority of analysts value the shares at between $3 and $4, based on projected profits.

No analysts even follow XO, which was the top stock for the quarter, up 117 percent to $3.95, or Optelecom, which climbed 84 percent to $24.60.

Based in Germantown, Optelecom -- with sales of $34 million and profits of $1.7 million -- is too small for stock researchers to bother with.

XO, on the other hand, is a $1.4 billion-a-year business. The Reston company lost $147 million last year. That's better than XO's $400 million loss the previous year, but these days most analysts are reluctant to recommend companies just because they are losing less money than before.

Besides, XO is controlled by financier Carl C. Icahn, who brought the company out of bankruptcy. Analysts -- and many investors -- are gun-shy about outfits whose future is totally dependent on their controlling stockholder.

XO and Cogent do demonstrate that the telecom industry is finally coming back. XO was one of the original players in the business of providing high-speed, high-capacity data and Internet connections to businesses. Most companies in that field went bust; there were simply too many of them and too few customers. Slowly the glut of communications capacity is coming down, allowing companies to charge enough to make some money.

District-based Cogent is a cleverly managed company that acquired a batch of floundering communications systems to create one of the world's 10 largest Internet networks. Revenue grew to $135 million last year and is projected to top $150 million this year. The business remains unprofitable but is projecting positive cash flow next year.

In this case, analysts are willing to bet on future profits. Cogent stock climbed 78 percent during the quarter to $9.75. Wachovia Securities recently called Cogent "the best asset play on the growth of the Internet" but cautioned against paying too much for the stock, recommending investors "buy on weakness."

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