COMMENTARY--Needham & Co. analyst Tad LaFountain has been something of a maverick on Wall Street for a long time, and he's living up to his past today.
He wants you to buy network equipment stocks. Now. In Bulk.
Last time I did a column on LaFountain was 11 months ago, and I still get the occasional e-mail from him, noting that he was right about Intel (Nasdaq: INTC) and I was wrong.
Fair enough--LaFountain took a lot of heat in previous years over his belief in Advanced Micro Devices (NYSE: AMD) and his doubts about Intel. He has every right to say "I told you so."
Since that piece last year, LaFountain moved on to become Needham's network equipment analyst. Fortunately, he didn't leave his wit and contrarian thinking behind. His reports are more interesting to read than 95 percent of what passes for research on Wall Street.
Today's piece from LaFountain tells people to buy network equipment stocks. The first sentences of his research note provide a reasonably tight summary of his argument:
"We believe that many investors are inappropriately focused on the unwinding of fundamentals from last year's unreal levels. As a result, there appears to be a loss of perspective and a disregard of underlying franchise values. With a representative sample of network equipment stocks down an average 86 percent from 52-week highs (and even more from all-time highs), the valuations appear to us to have corrected for the changed environment."
LaFountain's report is filled with his characteristic scorn for conventional wisdom. "Penetrating analysis" is his sarcastic description of the popular view that the network hardware industry is likely to get worse. Writes LaFountain:
"Put it all together and we are confronted with the emergence of the mantra du jour: 'They're all off a lot from their highs, but they're still not cheap.' Amazingly, all of a sudden, everyone wants to be Warren Buffet. At this rate, Omaha could get crowded."
He goes on to:
Deflate commonly cited historical comparisons. "Mainframes, minicomputers and modems are high-profile examples of segments that have been adversely affected by saturation. Maybe the lesson to technology investors should be obvious--avoid investing in segments that begin with 'm'. "
Defend network hardware vendors' revenue performance and growth prospects. "Conditions suck only in comparison with the unnatural levels of last summer and fall...This smacks of the typical dynamics of an unwinding of excess. It does not equate to an asymptotic run to zero."
Deride other observers' valuation calls. "Was there a law passed when we weren't looking that said you can only make money in stocks when they reach major bottoms? And that the major bottoms would be defined as low multiples on low earnings?"
Dismiss worries about inventories, excess bandwidth and weak telecom companies. "The networking customer base is undergoing a substantial reformulation as the nature of its charter has changed...The interplay between robustness, change and costs will go on for a long time. This is not new, and neither is the opportunity creation that will be a fundamental part of it."
So LaFountain wants you to ignore the naysayers and scarf up his networking stocks. I won't dispute most of his points. I doubt most analysts would argue with LaFountain about the long-term potential of the industry.
But he's blase´ about valuation calls. The Needham analyst points out that the stocks he covers--including Cisco Systems (Nasdaq: CSCO), Extreme Networks (Nasdaq: EXTR), Foundry Networks (Nasdaq: FRDY), Lantronix (Nasdaq: LTRX), Network Peripherals (Nasdaq: NPIX), Juniper Networks (Nasdaq: JNPR) and Packeteer (Nasdaq: PKTR)--are down anywhere from 59 percent to 95 percent from their all-time highs. He's not convinced that stocks need to hit "major bottoms" before rebounding.
Yes, there is no formal requirement that stocks smash their all-time lows before coming back, but there might as well be one. Wall Street wants valuations to come down, so they will.
There is no hard data backing that up, except in one area: the stock prices themselves. They're down, even though the long-term outlook for networking companies hasn't really changed for the past couple of months.
At this point, people need immediate reasons to buy. "We see no near-term catalyst that will alleviate pressure on the stock," wrote FAC/Equities analyst Matt Barzowskas, in a Cisco Systems research note also released this morning. "We continue to have a Neutral rating."
LaFountain's argument boils down to this: These networking equipment makers, and the industry as a whole, remain in solid shape for the long term. There is still plenty of growth out there. And the stocks have already fallen so much that it's a great time to buy.
It's an argument that could have been made at least for the past month for these stocks, but the market hasn't responded. People have set their sights on "Neutral" ratings, and they won't change it until they get some of those good old Catalysts with a capital C.
I doubt LaFountain's indisputable and entertaining arguments will change that. But if Wall Street wakes up and starts pushing these stocks higher without waiting for a Catalyst, I hope he tells me about it. I enjoy hearing about a market that's rising for the right reasons. 22GO>