Today, we present two stocks that we've been watching fall, fall, fall from their previously lofty valuations. Now, from current prices, these two stocks have a much better chance of producing healthy returns. We'll be profiling our best investment ideas from the Rule Breaker, Rule Maker, and general market worlds every month in the new TMF Select service.

Jeff Fischer on Handspring (Nasdaq: HAND)
We considered Palm (Nasdaq: PALM) last year, but took a pass. Then we watched Handspring. The company seemed to move more quickly than Palm. With lightning speed, Handspring introduced new products, the Visor handhelds, which were at least one generation ahead of Palm in functionality. The early Visors could become cameras, MP3 players, phones, and more. The basic Visor was a Palm III killer. Then came the Visor Edge, the Palm V killer, and we realized: Handspring has more gusto than Palm.

Palm is currently the top dog and first mover in the handheld computing industry -- on track to earn about $1.7 billion in 2001 revenue -- but Handspring is the first mover with gusto. Palm has products due out in May that will finally be offering some of what Visors have offered for months, meaning that what Visor has in store for customers next will again be one generation ahead of Palm's latest. Handspring already has trailing twelve-month sales of $360 million after launching in October 1999, so part of Palm's inventory buildup problem is due to Handspring stealing market share.

We're considering Handspring as a Rule Breaker stock because it shows gusto, we use and like its products, we believe that it's building a brand name that may be more distinct and meaningful than Palm's, and, last but hardly least, the founders of Palm left Palm to launch Handspring. That said, the risks are several: The industry is young and filled with competition. The industry will be large, but the eventual leading products are unknown.

At $14 per share, Handspring sports about a $2 billion enterprise value. It has nearly $200 million in cash and equivalents, which should be enough to get it through at least 2001. It may need to raise more money before it is expected to turn profitable, in 2002. We will keep watching, learning, and thinking about the company.

Tom Jacobs on JDS Uniphase (Nasdaq: JDSU)
I'm intrigued by optical networking -- using fiber optic components and systems to make the world safe for ubiquitous super broadband communications -- as fertile ground for Rule Breakers. But technical complexity makes it hard to discern the top dog and sustainable advantage of any company in this important emerging industry.

Lately, the whole sector has been hammered by a build up in inventories and pullback in telecom customer capital expenditures to construct the networks. JDS Uniphase, the leader in fiber optic networking components, might be poised to lead the optical revolution -- when and if its customers recover. Even though The Motley Fool's Rule Maker portfolio purchased JDS Uniphase, the company just may be more a Rule Breaker than Rule Maker. But with a $26.5 billion market cap, JDS probably doesn't offer the possibility for 10x/5y returns.

Avanex (Nasdaq: AVNX), a smaller company with a $865 million market cap, may possess Rule Breaking optical networking technology and offer investors 10x/5y potential. Some believe that Avanex's breakthrough for "muxing" -- selectively adding and dropping lightwaves from fiber optic communications systems -- could lead to individual fiber optic-light addresses in the same way that we currently have landline or wireless individual phone numbers. It's complex, and I would need to learn a lot more before proposing the company as a Rule Breaker.

Here's the dilemma in poetry, if you prefer:

What are some worthy Rule Breakers
Competing for your dimes?
There are always suitors
Even in the worst of times.

Many RBs are mentioned
But few are ever bought (quoth Buster)
And most we viewed in early fall
Have lost all of their luster.

USi, Ariba, and Webvan,
Edison, Akamai, and Priceline,
None made the cut or joined the clan 
And now they sigh upon the vine.

And InfoSpace or Phone-dot-com
Have lost their former glory.
Lernout & Hauspie, the speech rec bomb?
Bankrupt, limping -- end of story.

And oh! the fiber optic sector,
Once vaunted, has swan-dived.
If it resumes its upward vector
Will any have survived?

Fiber's important and emerging
Broadband enabler pour nous.
This puts investors on the prowl
To find the top dog in the zoo.

Will any of these optic firms
Now down and out and bleeding,
Recover and then zoom ahead
With profits vast, growth speeding?  

Is big gun JDS Uniphase
Poised to jump and lead and grow?
But its market cap is billions, twenty-six point five! 
That's about our price purchase for Amgen, you know.

JDS bought and bought 
Building a component castle,
Winning armies of optics engineers
To survive any market hassle.

Its patents, cash, employee knowledge
Are a wide deep moat to cross.
Can this sustainable advantage
Spin gold from fiber dross? 

Its relative strength may not be 90
Nor consumer brand be strong.
But several x times five y
Could reward longs ere long.

Perhaps it wasn't a Rule Maker yet
And is a better Breaker bet.*

Before we stop, there's Avanex,
With gizmos to add/drop light,
From long haul networks to the metro
It's disruptive, gearing for a fight.

But it's important to understand
The companies we invest in.
There's much more to study and learn 
To avoid the fiber optic dustbin.


*We don't view Rule Breaker investing as betting, but it is risky -- and "bet" rhymed. As you might guess, Tom Jacobs (TMF Tom9) will not be giving up his day job.

Jeff Fischer does not own any of the stocks mentioned in this article. Tom Jacobs owns JDS Uniphase. The Motley Fool is investors writing for investors.