Timing and Patience is Crucial

Picking stocks when they are down and out is really difficult. One thing’s for certain, when a stock trades below $5 per share (often referred to as a penny stock, even though they aren’t trading below $1) it is most often because the company is or has been in trouble.

So, if you like bottom-fishing, you are pretty much guaranteed to be looking at companies that are in distress.

With this in mind, you can make money betting on a company’s turnaround. Timing and patience is vital.

One such company that I’m following right now is Avanex Corporation (NASDAQ/AVNX). This company sells fiber optic products that are known as “photonic” solutions. These products help fiber optic communications networks increase capacity, make longer distance transmissions, improve connectivity, increase operating speeds, and lower costs.

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Based in Freemont, CA, Avanex was founded in 1997 and maintains facilities in Horseheads, N.Y., Shanghai, France, Italy, and Bangkok.

In its latest quarter, the fourth fiscal quarter of 2006 ended June 30, 2006, the company generated revenues of $45.5 million, representing growth of 13% over the previous quarter and a 6% increase over revenues of $42.7 million generated in the comparable quarter of the previous year.

In the fourth quarter, the company reported a net loss of $8.4 million, or ($0.04) per share, as compared to a net loss of $10.2 million, or ($0.06) per share in the prior quarter, and a huge net loss of $42.8 million, or ($0.30) per share in the fourth quarter of the previous year.

The company finished its fiscal year with cash and short-term investments of $74.3 million. This figure includes net proceeds of approximately $44 million after an equity offering in March this year.

Looking ahead, Avanex expects revenues for the first fiscal quarter of 2007, ended Sept. 30, 2006, to come in between $48 million and $50 million. Clearly, the company is recovering from tough business conditions in the past.

Although it is super high risk, I think this company is worth betting on. Two big questions remain: Will the company keep recovering and will the investment community take notice?