It's early into 2011, but we're already seeing a group of companies breaking out and stomping the general market. I've compiled a list of the top five performers in the communications equipment sector. Seeing which companies are rallying ahead of the pack might either show excellent execution from the businesses themselves, or a larger trend that could propel into sub industries forward.

In both cases, this can be extremely valuable. In the case of businesses executing, leaders in expanding fields can be discovered. In the case of larger trends, you can use the information to search out other stocks that are following the same trend and might not have seen the same price appreciation. Call it buying into inevitable trends on the cheap.

Without further ado, here are the top five communications equipment performers so far in 2011:


Market Capitalization (Millions)

YTD Return




Alcatel-Lucent (NYSE: ALU)



Opnext (Nasdaq: OPXT)



Polycom (Nasdaq: PLCM)



Powerwave Technologies (Nasdaq: PWAV)



Source: Capital IQ, a division of Standard & Poor's. Screen is for companies with market capitalization in excess of $200 million. Returns are from Dec. 31, 2010 to May 27, 2011 and are adjusted for dividends.

Ride that boom
As data growth booms and consumers and businesses rapidly adopt mobile technology, the communications equipment industry is seeing its fair share of growth. Of the four companies above, Opnext and Emcore are both closely aligned to fiber optic components that are needed for next-generation high-speed data transmission.

On a larger scale, Alcatel-Lucent sells a wide-ranging product portfolio to large telecoms. In the past, that's been a recipe for trouble. Telecoms were able to play Alcatel against other rivals like Nokia Siemens and gain significant pricing concessions. However, with the rapid build-out of mobile networks and the need to upgrade network infrastructure to handle more data, networks have lost some of their pricing power. The result has been Alcatel-Lucent finally turning profitable over the last 12 months after years of crushing losses.

Also making the list is Powerwave Technologies, a company whose sales are lumped into the network operator industry. The company sells varying radio frequency (RF) solutions to wireless networks across the world. Not too unlike Alcatel's situation of dealing with customers with large pricing pressure, Powerwave also sells to a concentrated customer base that can also demand concessions in difficult economic times. For example, the company derives about 25% of its sales from largest customer Nokia Siemens. Because of this, Powerwave's fortunes have largely mimicked its largest customers. When they struggled, Powerwave followed and racked up huge losses throughout the recession.  However, with demand surging, the company has been able to get better pricing and cut administrative costs during the downturn. The combination of "leaning out" its cost structure and better gross margins has allowed the company to return to profitability.

The question for all the companies listed above is how long the current boom cycle will last, and whether industry dynamics have moved in their direction. For example, AT&T recently chose Alcatel-Lucent as a "domain supplier" over rival Tellabs in a move that surprised industry observers. The move points to wireless providers like AT&T consolidating among fewer vendors, which would help diversified equipment players like Alcatel-Lucent and Nokia Siemens, while hurting firms with smaller product portfolios like Tellabs.

One more winner
Lastly, Polycom also made the list with a sterling 47% gain thus far this year. The company can thank a couple of very strong earnings beats for its continuing upward trajectory. Polycom's upward growth is even more impressive once you consider that larger rival Cisco (Nasdaq: CSCO) is busy re-organizing its video communications segment after a failed misadventure into the consumer market with its Umi line. Polycom might be in a battle with Goliath, but it's been more than holding its own.

Keep updated with a watchlist
While none of the previous companies are formal recommendations, staying ahead of companies executing and in favorable industries can help you uncover more winners for the coming years. To stay updated on any of the companies mentioned in this article, make sure to add them to our new free My Watchlist feature today. You'll get up-to-date information on all the companies, and you can also follow larger industries like communications equipment: