COMMENTARY -- CIBC World Markets analyst Steve Kamman could have sold networking investors on his latest conclusions.
He could have. Might have. At least he would have had a shot -- if he weren't going beyond contrarian into the realm of incredulity.
CIBC issued an uber-downgrade, dropping Cisco Systems (Nasdaq: CSCO) and Redback Networks to "hold" from "buy" advisories, and Juniper Networks (Nasdaq: JNPR) to "buy" from a "strong buy" rating.
By themselves, those downgrades might have influenced investors if Kamman hadn't also decided to praise the biggest question mark of the networking sector: Lucent Technologies (NYSE: LU), upgraded to "buy" from a "hold" label.
Kamman's reasons are different in each case. Kamman, who is picking up networking coverage for CIBC, describes Juniper as a great company but an expensive stock. He views Redback as a company tied to legacy corporate networks and facing stiffer rivals now that Ciena (Nasdaq: CIEN) and Cisco have bought competing technology.
The Cisco call is a gutsy one, and largely based on a technological and strategic evaluation, rather than a financial one.
Make no mistake, Kamman does question Cisco's earnings and revenue expectations. The CIBC analyst thinks Cisco will miss sales forecasts because of the widely-reported problems at telecom companies.
He may have a point. At a Morgan Stanley Dean Witter conference in Arizona, Cisco CEO John Chambers this morning admitted that the current quarter has been "more challenging" and told Wall Street to expect a wider range of estimates from analysts. Chambers also sees a slower pace of hiring.
But Kamman's larger argument is a more basic one. Although Kamman believes Cisco routers will stay dominant in corporate networks, he blasts Cisco's future growth strategy.
Kamman argues that Cisco's plan for end-to-end, feature-rich networks will fail because the companies will ultimately prefer simpler, cheaper networks based on the best individual offerings, rather than an integrated, all-in-one solution. Juniper's growing market share in core routers -- 30 percent by one estimate -- indicates preference for focused products rather than broad ones.
CIBC's analyst also questions Cisco's future ability to acquire new technology and keep employees because of the sliding price of CSCO shares. I wouldn't worry about that yet; the stock price will take care of itself if the economy recovers and the company doesn't stumble.
But the rest of Kamman's Cisco thesis looks intriguing. That doesn't mean it's correct, but the ideas are not implausible.
Unfortunately, Wall Street will find it hard to take everything seriously when it's lumped with praise for a morass.
Kamman admits Lucent needs to take care of some big gaps, including a new CEO who can give the company a coherent strategy.
Yet Lucent is a safe harbor in the networking sector because the stock isn't likely to decline much from its current levels, Kamman says. Considering that Lucent has some ideas that could jolt Wall Street -- notably plans for the Agere spin-off -- Kamman thinks Lucent has nowhere to go but up.
It is one thing to call an end to a networking behemoth's halcyon days. It's quite another to ask investors to accept that the best alternative is a rudderless rival who has been whipped for the last several quarters. At least wait until a company has a head before praising the body.
That explains why Wall Street seems to be split on CIBC's report. Juniper is down slightly and Cisco down more (probably because of Chambers' remarks rather than Kamman's), but Redback has gained a bit. Lucent has hardly budged on Kamman's optimism even though we're in a market where investors ought to be looking for reliable protection.
Kudos to Kamman for going beyond the analyst herd. You can argue that his downgrades are coming after some steep declines already, but the fact is that he is taking a stand where most analysts are not.
Just don't be surprised to see that the Street isn't giving him too much credit for it. Rebellion only goes so far. 22GO
• Is Lucent an attractive safe harbor?
• CIBC: Cisco's glory days are over>