Optical Networking Stocks: Death By A Thousand Cuts

Sometimes whole sectors are sold off without much discrimination between the different names. This opens up opportunities for the rational investor.

For instance, the optical networking sector has sold off, multiple times on news of a slowdown in Chinese demand.

However, by no means all of these networking stocks have comparable exposure to China; some don't even have any.

There are also valuation anomalies at work which are tradable, in our view.

The optical networking stocks rallied last year, mostly driven by hyperscale build-out in the US and China. Then the rally stalled and reversed as there were signals out of China that orders were delayed. And this scenario has been playing out multiple times this spring.

Every time a rumor, or some analyst checking channels in China came out with bad news, the optical networking stocks plunged yet again, no matter how booming their other business might be. Things have overshot their usefulness, in our view.

Let's see the carnage.

This slowdown in China now seems real, so it becomes interesting to see which stocks are most affected; here is Investor Business Daily:

According to a UBS report, NeoPhotonics has the highest exposure to China at 60% of revenue, followed by Oclaro at 40%, Acacia Communications (NASDAQ:ACIA) at 40%, Lumentum at 30%, and Finisar at 20%.

Article continued at link