What's Wrong With Optical Networking Stocks Today?

Networking is not a sector for nervous investors.

Optical networking specialist Oclaro (NAS: OCLR) just presented $86.5 million in second-quarter sales and a non-GAAP loss of $0.35 per share. Both numbers were significantly better than Street estimates. Revenues fell 18% year over year, but still came in at the top of management guidance. There's even a perfectly normal reason for the drop, well beyond the company's control: Flooding in Thailand cramped the production of five Oclaro product lines. We knew this.

The weak results shouldn't have surprised anyone, in other words. In fact, the flood recovery is running ahead of schedule. According to CEO Alain Couder, there's even a silver lining to the damage: Oclaro was revamping its operations and processes anyway, and the floods forced the company to accelerate that process.

And yet, Oclaro shares fell as much as 12% on the announcement, as if management just stole your dog and canceled Christmas. The news even dragged down sector peers Finisar (NAS: FNSR) and JDS Uniphase (NAS: JDSU) , though neither company had anything to report today. JDSU dropped as much as 5.1% and Finisar wasn't far behind. So what's the industry-changing problem?

Well, the company is sticking to its estimate of two quarters drenched in Thai floodwaters. The next quarter will continue to suffer from that disaster, so the revenue forecast landed below the analyst view.

That's about it, really. All of Oclaro's reassuring news counts for naught against a somewhat soft revenue outlook. Mr. Market is reading this as a terrible omen for the optical sector in general. Mr. Market is insane.

I can sort of take JDSU sinking on further Thai troubles, as the company reported significant damage as well. But Finisar stayed relatively dry. Moreover, Oclaro's recovery efforts are very separate from JDSU's -- and Oclaro is actually getting back on its feet pretty quickly.

Granted, all three stocks climbed quickly to start the year, and this drop can be seen as a correction to overheated hopes. But that was a bounce off a very low base as investors lost all hope for optical networking in December. All told, this trio has underperformed the S&P 500 since early November.

The long-term prospects for super-fast networking are fantastic. That's why I'm using this short-term price drop to start a CAPScall on Oclaro today. The next bounce will boost my All-Star status even further.

Although Oclaro is still not the Fool's top stock, we do have one stock in mind that appears poised to succeed in 2012. Find out who snagged that honor in a special report, free for a limited time.

At the time thisarticle was published Fool contributor Anders Bylund holds no position in any of the companies mentioned. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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