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Stalled or Stellar? An Update on Our Top Stock for 2011

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Broadband traffic is growing like a zombie infestation. Networking expert Cisco Systems (Nasdaq: CSCO  ) predicts consumer Internet traffic quintupling from 2010 to 2015 for a 36% annual growth rate, led by emerging markets joining the party and high-definition video eating gobs of bandwidth. Business traffic isn't far behind with a 22% annual growth rate. Big data is everywhere.

This data boom creates tons of market opportunity for builders of network infrastructure. Cisco and Alcatel-Lucent (NYSE: ALU  ) have their fingers in many large-scale builds regardless of the technology involved, with Juniper Networks (Nasdaq: JNPR  ) sniffing around the occasional long-haul opportunity; Calix (Nasdaq: CALX  ) is an underappreciated operator in telecom infrastructure, and JDS Uniphase (Nasdaq: JDSU  ) offers plenty of fiber-optic help to that segment; while Arris Group (Nasdaq: ARRS  ) is a big name in cable-based systems.

The opportunity here is so huge for a focused infrastructure builder that the Fool called Arris out as the best stock to own in 2011. We even dedicated a three-page free report to Arris, explaining in detail what's so great about the business. Go ahead and grab your copy now if you haven't already -- it's absolutely free and provides far more information than the little article you're reading now could possibly cover. I'll wait here until you get back.

And now, back to the show
By now you might be asking, "How come Arris investors are losing to a simple S&P 500 index so far in 2011 if the stock is so darn great?"

Fair enough. The company got off to a great start with a fine fourth-quarter report in February, and Arris shares were beating the market by a sizeable margin at the time.

But then the wheels fell off the stock after the first-quarter report, and Arris hasn't recovered since. There wasn't anything structurally or fundamentally wrong about that report or the second-quarter guidance it offered -- earnings and sales fell comfortably within the original guidance, though analysts were expecting slightly more, and the forecast also conformed to Street expectations.

Some of these drastic drops simply make no sense. This is one of 'em. In other words, as good as Arris looked at the start of 2011, it's an even deeper value now.

What to do now
Dumping Arris on a very slightly disappointing three-month outlook misses the forest for the trees. Dig deeper and you'll see the order backlog growing by 26% quarter-over-quarter to create a very favorable book-to-bill ratio of 1.14: The contracts are coming, just on longer terms than expected.

The product pipeline is packed with promising cash machines, including upgrades to Arris' existing installations of high-speed DOCSIS 3.0 systems and a new range of specialized handlers for video streams. The company also recently demonstrated an ultrafast method for combining several channels of existing cable pulls into a single connection, upstaging many fiber-optic systems. Arris is not getting left behind as broadband speeds accelerate -- it's actually a leader in that race.

As long as leading customers Comcast (Nasdaq: CMCSA  ) and Time Warner Cable need faster and better networks, Arris will deliver what they need. There's always some competition with arch-nemesis Cisco and others, but Arris is holding its own and then some.

There's no question in my mind that Arris has a lot of business going on -- and that the stock isn't getting enough credit for it. You can buy shares today for less than 0.9 times trailing sales, taking the strong balance sheet into and netting out its cash balance. If Arris was a great buy in January, it's even better today as you get to buy in at a cheaper price with the business case still intact.

Learn more about Arris and its tremendous growth drivers by grabbing that free report we talked about already. In case I'm already preaching to the choir, you can simply add Arris to your Foolish watchlist to stay on top of news and analysis of this stock -- or any other ticker you'd choose to watch.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems as well as shorting JDS Uniphase and Juniper Networks. Try any of our Foolish newsletter services free for 30 days. We Fools con't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2011, at 11:09 PM, dboyanich wrote:

    I am wondering why the top brass in this company has sold out most of their shares over the last 6 months. This scares me since it could indicate trouble ahead? The CEO and CFO have dumped large quantities of shares, and I would think that if they had any idea that Arris would make out well in the market, wouldn't they want to keep the shares and cash out later with a nice gain?

    What do you think is driving the shares for sale here?

  • Report this Comment On June 25, 2011, at 12:05 PM, TMFZahrim wrote:

    @dboyanich, you forget to account for the officers receiving stock options as part of their compansation. Every time they convert options into shares and then sell them to generate cash income, investors get scared about big, consistent sellouts. The options exercises don't show up in Yahoo Finance's "insider trades" rundown, after all.

    Capital IQ shows that both Potts and Stanzione have actually increased their Arris holdings over time as they convert and sell less than their full options allotments. You can arrive at the same conclusion by combing SEC filings -- check proxy statements to see the holdings changing year by year.

    In short, nothing to worry about here because the apparent sellout of huge stakes is actually nothing of the sort.


  • Report this Comment On June 25, 2011, at 12:07 PM, TMFZahrim wrote:

    Example here:

    22-Jun-11 66,667 ARRS Option Exercise at $10.20 per share.

    (Cost of $680,003)

    22-Jun-11 66,667 ARRS Automatic Sale at $10.88 per share.

    (Proceeds of $725,336)

    ...sold shares generated by an options exercise, no more and no less. Yet only the share sale shows up in the Insider Trades section:

    Purchases N/A 0

    Sales 1,194,860 14

    ... no line to account for options exercises. Many companies use options in lieu of cash paychecks for accounting reasons.

    Hope that helps,


  • Report this Comment On July 08, 2011, at 10:55 AM, paddlinfaster wrote:

    The thing I have not & still don't understand is why "THE MOTLEY FOOL"S TOP 2011 STOCK PICK" has not been selected by any of the newsletters as even one of their monthly picks. Why?

    I've been interested in the company/stock since I 1st read the original report but since it's not appeared on any of my newsletters as a pick, I've held back.

    Just don't understand this discrepancy.


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