If any segment looks promising for 2017, it may be optical communications, and with good reason. Many of those stocks outperformed the S&P 500 last year, and with numerous catalysts coming in 2017 and beyond, there is a good chance they could outperform yet again. Wall Street research indicates the industry average returned 62.5%, outpacing the Nasdaq Composite and S&P 500 returns of 7.5% and 9.5%, respectively.
A new Stifel research report notes that the firm’s coverage universe significantly outperformed market indexes, with the exception of Infinera, which saw a decline of 53.1% in share price. The analysts remain positive on the sector and said this in the report:
Our investment thesis for the optical communications industry is based on three major themes:
(1) network upgrades in China.
(2) hyperscale investments in intra-and inter-datacenter networking.
(3) 100G metro upgrade cycles.
Four stocks were rated Buy, and they all look outstanding for aggressive growth accounts.
This stock took off in the fall and has pulled back recently, offering a very good entry point for investors. Finisar Corp. (NASDAQ: FNSR) provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China and internationally.
Finisar’s optical subsystems primarily consist of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers and servers used in wireline networks, as well as the antennas and base stations used in wireless networks.
The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers and photodetectors for data communication and telecommunication applications, as well as passive optical components for telecommunication applications.
The analysts noted in the report:
Our research suggests demand for datacom products is likely to remain robust in 2017, with Finisar having unmatched breadth of products and vertically integrated capacity that uniquely allows the company to address demand requirements. We see 100G driving growth again, which we note made up 30%-35% of Finisar’s datacom revenue in its last reported quarter (October).
The Stifel price target for the stock is $42, and the Wall Street consensus target is 42.88. The shares closed yesterday at $29.34.
This is another top company that is riding the wave of enterprise data center growth. Fabrinet Inc. (NYSE: FN) is a leading provider of advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and subsystems, industrial lasers and sensors.
Fabrinet offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, advanced packaging, integration, final assembly and test. Fabrinet focuses on production of high-complexity products in any mix and any volume.
Stifel cited this in its report:
We expect Fabrinet’s optical communications segment to drive growth in 2017, with both telecom and datacom likely to sustain elevated growth rates, benefiting from a ramp in silicon photonics, China tailwinds, and Verizon’s 100G metro rollout. Telecom in particular should benefit from metro deployments contributing more substantively to growth, and is likely to outpace datacom growth in 2017.
Stifel has a $50 price target, and the consensus target is $52.29. The shares closed Tuesday at $37.98, down almost 6% on the day.