Small-cap companies are among my favorite to research, because you can often uncover great stocks that analysts have neglected or simply not discovered yet. These tiny businesses can offer the ultimate risk-vs.-reward ratio, but they're not for the faint of heart.

I've dedicated this 10-week series to finding the 10 small caps to rule them all. The previous nine choices are:

This week, as the final chapter in this series, I want to highlight optical networking component supplier Oplink Communications (Nasdaq: OPLK).

What it does
Oplink Communications sells optical networking components in what has become a very crowded sector occupied by larger rivals JDS Uniphase (Nasdaq: JDSU) and Finisar (Nasdaq: FNSR). The company is looking to buck a two-year revenue downtrend in 2011 and is projected to grow by 30% per annum over the next five years.

How it stacks up
I know some of you must be scratching your heads at this pick, given that the fiber sector is swooning and Oplink, like the majority of the sector, came out and issued rather weak earnings guidance last week. But even considering this earnings warning, the company is in better financial shape than most of its rivals and is priced at potential bargain-basement levels.

Oplink's most recent quarter highlighted a 59% jump in revenue over the year-ago period and another considerable jump in cash on hand to $9.84 per share. Considering Oplink has no debt, more than half of the company's current market value is derived from its cash balance.

Let's see how Oplink compares to some of its closest rivals, and Ciena (Nasdaq: CIEN), an end customer of the fiber optic component market:


5-Year Expected Growth Rate

Forward P/E


Oplink Communications 30.00% 13.5 $196.0M / 0
JDS Uniphase 14.70% 19.3 $664.5M / $281.1M
Finisar 15.50% 15.4 $310.2M / $57.9M
Oclaro (Nasdaq: OCLR) 20.00% 36.7 $74.9M / 0
Opnext (Nasdaq: OPXT) 14.00% N/A $86.2M / $49.3M
Ciena 17.80% 25.6 $625.8M / $1.44B

That's not a misprint folks -- Oplink is a discounted fiber play based on these figures. Opnext and Oclaro may not even turn a profit in 2012 while Ciena, Finisar, and JDS Uniphase have expected growth rates which are roughly half that of Oplink, yet all three trade at significantly higher multiples. Not to mention that Oplink is the most cash-rich company of the bunch in relation to total market value.

How it could make you money
Everyone keeps pointing to JDS Uniphase as the lone wolf that beat in the optics sector, but given its perpetual lowball estimates, it's no wonder why it beat. Oplink was able to produce nearly identical results and everyone immediately dismisses the stock as a failure. Oplink's 30% five-year expected growth rate is tops in a sector overloaded with inventory at present. Oplink's cash position gives the company an ideal position to consider joint ventures or weather industry corrections without risking a major dent to shareholder equity. And speaking of cash ...

With its stronger cash position, I'd have to think that Oplink would make an attractive takeover candidate. For slower growth mid-cap names like Ciena or Finisar, adding a company like Oplink would make sense, as it would give them a much needed cash boost and would more than likely begin adding to their bottom line almost immediately.

Oplink could get bought out or it could grow organically. Either way, it looks like a win-win for shareholders at these levels, and that's the reason it is my 10th and final pick in the 10 small caps to rule them all.

Come back to next week for the first installment of the 10 mid-caps to rule them all!

What's your take on the optical networking sector? Is there something I'm missing? Share your ideas in the comments section below and consider tracking Oplink Communications as well as your own personalized list of companies with My Watchlist.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.