Should You Be Investing in This Hot Sector?

It has effectively been 10 years since I've been able to say this with a straight face, but fiber optics stocks are hot once again! Corporate spending has been healthy and telecommunications providers are spending in hoards to get their respective networks up to speed. This spending has translated into countless new 52-week highs across the sector and many companies have raised earnings expectations. But here's the best part: You still have an opportunity to cash in on this growth. The real challenge comes in picking out which companies have the most room left to run.

Company

5-Year Expected Growth Rate

PEG Ratio

Alliance Fiber Optic (Nasdaq: AFOP  ) 25.0% 0.94
Oclaro (Nasdaq: OCLR  ) 20.0% 1.21
Finisar (Nasdaq: FNSR  ) 17.5% 1.06
JDS Uniphase (Nasdaq: JDSU  ) 18.0% 1.20
Oplink Communications (Nasdaq: OPLK  ) 30.0% 0.39
EXFO (Nasdaq: EXFO  ) 31.0% 0.74

Although all six of these fiber optics plays are predicted to grow dramatically over the next five years, three have the potential to be clear winners.

Uplink Oplink
Oplink Communications might earn me the 20/20 hindsight badge, but last night's quarterly earnings are simply too strong to ignore. I can't remember the last time a CEO described the fiber optics business as "encouraging," but this report sends nothing but bullish signals. Oplink hit the trifecta by reporting a 59% rise in revenue, profits that blew past analyst expectations, and increased guidance from the prior quarter. Its cash position of $8.58 per share provides further evidence that cash flow remains strong and is another reason it may outperform the sector.

It's a bird, it's a plane, it's EXFO
It looks like Canada-based EXFO could be the play to own geared toward growth in the telecommunications sector. It reported significantly stronger earnings growth just two weeks ago, exceeding its own prior guidance. Of the six companies mentioned here, EXFO boasts the highest anticipated five-year growth rate, yet still has a reasonably cheap PEG ratio of just 0.72. It has received quite the earnings boost already, but this may be just the tip of the iceberg.

Micro-cap gem
Alliance Fiber Optic rounds out the trio and is the only company of the three that hasn't yet reported quarterly figures. Despite being a relatively unknown micro-cap, Alliance Fiber Optic has a rich history of profitability and its strong cash flow has led to a nearly $5 net cash position. Two of its past three quarterly reports doubled the lone analyst's earnings-per-share estimate. Given the figures we've seen from EXFO and Oplink, chances are in Alliance Fiber Optic's favor that it could have another stellar quarter when it reports next week.

You may be wondering, why no love for JDS Uniphase, Oclaro, and Finisar? JDS' growth has proven unreliable for nearly a decade, while Oclaro's recent earnings history has seen it come up short more than once. Finisar isn't a bad company, I simply preferred the metrics of the other three companies.

What's your take on this fiber optics growth spurt? Is it a temporary move higher or is this all part of a long-term sectorwide growth trend? Chime in with a comment below!

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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He did his best to refrain from using fiber jokes. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy never misses expectations.


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