Strong Bandwidth Tailwinds to Power Oclaro Stock Higher
The demand for advanced next-generation bandwidth technology will provide a massive opportunity in the decade ahead for innovative technology companies such as small-cap Oclaro, Inc. (NASDAQ:OCLR), which could really catapult from the tailwinds.
You only have to think about the bandwidth required for streaming video, VoIP, big data, and the rise in software applications offered via the cloud. This will drive the market demand for networking technology and will benefit companies like Oclaro.
Oclaro provides some of the critical hardware required to power the networks, including optical components, modules, and subsystems. Clients are found in Telecom Optical Networks, Enterprise Networks, and Data Centers.
Here we are talking about staggering lightning speeds in excess of 40G and not the 4G many of you are accustomed to using.
With a market-cap at around $1.50 billion, Oclaro stock is small, but its optical technology is highly regarded.
OCLR stock provides investors with a chance for longer-term gains or even to become the target of a takeover from a bigger company that is looking to add growth.
Oclaro has outperformed the S&P 500 with a move of 61% over the past 52 weeks. While it has more than doubled from its range low of $4.25, the price appreciation potential is still huge, especially if it can recover resistance at $10.00 and move back to the $11.30 range high.
A look at the monthly chart of OCLR stock below displays the emergence of a bullish double bottom in late 2013 and late 2014 prior to the start of a strong upward channel.
Chart courtesy of StockCharts.com
The weekly chart below shows the subsequent bullish golden cross surface in November 2015, with the 50-day MA breaking above the 200-day MA and confirming the break higher.
Chart courtesy of StockCharts.com
Now OCLR stock is seeing some near-term technical weakness—declining Relative Strength Indicator (RSI) and Moving Average Convergence/Divergence (MACD)—and is down 11% over the past five days. However, this represents an aggressive opportunity.
If Oclaro stock can hold, the stock could eventually target the $18.00 level, last encountered in 2011, representing a double from the current levels.
My Fundamental Bull Case for OCLR Stock
The fundamentals also support the technical side and my bull thesis for Oclaro.
After revenue declined in FY14 and FY15, Oclaro came back with a growth of 19.3% to $407.91 million in FY16. Moreover, the positive revenue trend is expected to continue at an impressive 50.6% to $614.13 million in FY17, followed by 15.1% to $706.64 million in FY18, but there is a high estimate of $750.0 million (Source: “Oclaro, Inc. (OCLR) – Analysts,” Yahoo! Finance, last accessed April 6, 2017.)
In addition, Oclaro managed to expand gross margins to 28.5% in FY16, up from 16.7% in FY15 and 13.33% in FY14.
On a quarterly basis, Oclaro has beaten the consensus EPS in three straight quarters and seven of the past 10 quarters.
While I’m bullish on OCLR stock, there are many that are bearish and betting against the stock, at least for now. There is a short position totaling 36.67 million shares or 25.35% of the float. (Source: “Oclaro, Inc. (OCLR) – Statistics,” Yahoo! Finance, last accessed April 6, 2017.)
Should the stock rally, I expect some decent short-covering buying support to lift OCLR stock.
As far as the valuation, Oclaro is expected to see its price-earnings multiple fall from 27-times trailing EPS to an attractive 10.94-times its estimated FY18 EPS.
Given the cheap forward P/E and a PEG ratio at a mere 0.89, Oclaro stock is cheap. The PEG implies OCLR stock is trading at a discount to its projected five-year CAGR for earnings.
Assuming Oclaro stock can trade up back to $18.00 as reflected by the technicals, this would still imply a reasonable P/E of 21-times and PEG at below 2.0.