Optical networking stocks have received a collective spanking in 2011. Plunging 65% year-to-date, few have suffered as deeply as optical components maker Oclaro (Nasdaq: OCLR).

Why are Oclaro's feet held closer to the fire than industry peers Finisar (Nasdaq: FNSR), JDS Uniphase (Nasdaq: JDSU), and Opnext (Nasdaq: OPXT)? Last week's fiscal fourth-quarter report might give us some clues.

Oclaro's fourth-quarter sales came in at $109 million, or 3% below the year-ago quarter. The dwindling revenues were met with rising operating expenses -- and to top off the bad news, Oclaro did a $20 non-cash writedown of its goodwill balances. The $0.22 of GAAP net income per share in last year's fourth quarter has become a net loss of $0.75 per share.

The outlook for next quarter points to flattish sales and even weaker margins, which should lead to another round of losses. Ouch.

Management describes 2010 as a year of transformation and 2011 as one of innovation, all positioning Oclaro for "growth as the telecom optical market recovers." In other words, the company would like to shift blame for this disappointing quarter and year onto the likes of AT&T (NYSE: T) and Verizon (NYSE: VZ) for not building out their next-generation networks any faster.

But if that was the whole story, why do JDS Uniphase and Finisar manage to grow sales two or three times as fast as Oclaro in exactly the same operating environment? And those rivals are pulling off huge growth without sacrificing margins, as evidenced by their positive earnings margins.

Under these circumstances, I think you have to question Oclaro's ability to execute. The company is working in a very competitive industry and seems to be losing more contract battles than it wins. Oclaro's shares have lost some 30% of their value in the last month alone, and I can't tell you to jump in with both feet to take advantage of the panicked-selloff mispricing -- Mr. Market may be onto something this time.

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