By Horacio Marquez
Contributing Editor
Money Morning

We have been raking in huge profits in all our cyclical and aggressive plays since we called the turnaround in Brazil last October 27: Petroleo Brasileiro (NYSE: PBR) — known as Petrobras – Vale (NYSE: VALE), Apple Inc.  (Nasdaq: AAPL), BHP Billiton Ltd. (NYSE: BHP), Research in Motion Ltd. (Nasdaq: RIMM), IBM (NYSE: IBM), Amazon.com Inc. (Nasdaq: AMZN),  Diamond Offshore Drilling Inc. (NYSE: DO), and Ciena Corp. (Nasdaq: CIEN) have all done splendid. And over the longer term, all of these companies are going to continue delivering, with some obvious profit-taking bouts along the way.

One of such profit-taking episode could be starting right now.  And it could be driven by Standard & Poor’s recent downgrade of United Kingdom’s sovereign debt rating.  This was in turn followed by the comments coming out from PIMCO that suggest the United States’ debt rating could be in jeopardy.  Even though S&P minimized that possibility, when Bill Gross speaks, the bond markets listen. 

At this point, it is good to look for the defensive plays that have been neglected in this upturn and for safe havens for investors taking profits from the recent run.  After looking long and hard, I came to General Mills Inc. (NYSE: GIS).

General Mills met earnings expectations in March and raised its earnings outlook.  It has been benefiting from the drop in commodities prices, especially agricultural. In addition, the firm, like many in the consumer business, has suffered from a strong U.S. Dollar, which reduced the value of the profits abroad.  The nice thing about consumer staples is that, since people have to eat in good and bad times, these companies are not cyclicals, but rather suffer very little in downturns.

That has been the case for General Mills, which in the last report showed a 4% sales increase from the same quarter in the prior year.  And this sales increase was achieved despite a 6% drop in the sales of food service and bakery products, where the firm nonetheless managed to increase pricing.  But this sector is being de-emphasized with some divestment.

Just think about the solid brands that allow General Mills to dependably keep chugging along every quarter, increasing sales as the population grows. General Mills also boasts well established and new brands that keep increasing its market penetration around the world.   Since then, the dollar has corrected in value and the commodities prices have dropped. That will show up in next month’s earnings report and the stock should perform nicely. 

The company is dominant with its Pillsbury brand, which has more than two-thirds of the market.  Cheerios, which has come under some scrutiny for health claims by the FDA, is the top cereal franchise in the ready-to-eat segment.  In addition, we are going to see hundreds of new products being launched soon.

The global story is only beginning for this company, even though they are already in China, and many other fast-growing emerging markets.  This international presence, which right now accounts for only 20% of the company’s total sales, is likely to grow much faster in the near future.  This will be achieved with joint ventures and by leveraging the brands that have the highest international penetration, like Nature valley and Haagen Dazs.

The stock is trading with a price-earnings ratio of only 16 times and an attractive dividend yield of 3.3%. But looking at the company’s growth, it is trading at only 13 times future earnings.  This is a low-risk proposition, as both the company earnings and the dividend appear to be very safe. In addition, the stock has a small short ratio that should diminish if we see profit-taking in the cyclical.

Last but not least, in addition to the short-term technical turning bullish at the end of April, as the stock crossed its 13-day and 50-day exponential averages to the upside, the long-term technicals have also turned bullish and the stock is still way oversold.

 Recommendation: Buy General Mills Inc. (GIS) at the market and accumulate more if you see weakness (**). 
(**) – Special Note of Disclosure: Horacio Marquez holds no interest General Mills Inc.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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By Horacio Marquez
Contributing Editor
Money Morning

In last week’s Buy, Sell or Hold I recommended Corning Inc. (NYSE: GLW), based on three factors:

• The coming global “arms race” to get nationwide broadband connectivity. The arms race recently heated up with the launch of Australia’s $31 billion nationwide broadband plan, which dwarfs the $7 Billion contemplated in the current U.S. budget.

• China’s has accelerated its broadband buildup, which was highlighted by Corning in its conference call as compensating for a weak U.S. telecom segment. China’s broadband buildup is a component of its $585 billion stimulus package.

• Inventory liquidation appears to be behind us, and carriers, who are facing double-digit internet traffic growth, cut expenses for equipment to about 2% to 3% of revenue, down from their traditional level of 15% of revenue.  This cannot go on for long.

Well, these same three factors are propelling Ciena Corp. (Nasdaq: CIEN).  Corning leads in optical fiber, but Ciena leads in the supply of sophisticated networking equipment.

Ciena just launched a partnership with NYSE Euronext (NYSE: NYX) on something that is very near and dear to the hearts of investors: “Speed and ultra-low latency to facilitate unparalleled execution of equities quotes, trades, options data and other financial transactions in the U.S., Europe and globally.”Â
Indeed, few activities have the sensitivity to speed, volume and reliability of data transmission as stock and options trading.

Ciena’s proprietary dense wavelength division multiplexing technology gets up to 100 Gigabytes per second, a first in the world.  So, if you want to be fast and have huge data transmission capabilities, you have to have Ciena’s products.  But Ciena’s competitive advantages do not stop there.

Ciena’s products allow carriers to get more capacity from fiber optic networks that are already deployed.  And their intelligent traffic allocation offers superior efficiency, as well.  These are competitive advantages that take time to match.

I absolutely love these technological leaps, which produce margin expansion and sales pickup at the same time, the surefire recipe for a bigger bottom line.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.” Â

And as I mentioned with regards to Corning, the United States is lagging behind 14 other Organization for Economic Cooperation and Development (OECD) countries in broadband access, price and speed.  This is a national crisis.

The telecommunications industry will not be able to stay put with the status quo.  There is an explosion of video over the Internet.  Not only do we see the phenomenon of YouTube.com, but we now have many other sources of voracious bandwidth accelerating dramatically. 

Mainly, there is a huge pickup in activity in streaming TV series, sports and movies on sites like Hulu.com, as well as movie and song downloads.  In addition, you have video conference calls including earnings results and video web-events, such as Money Morning’s own webinars.

Also, there’s the push towards cloud computing, which features all the data and applications residing and being processed in a remote server, like those of Amazon.com Inc. (Nasdaq: AMZN) ad Yahoo! Inc. (Nasdaq: YHOO).

Last but not least, there’s been a huge surge in online video gaming and you see product demos and video ads populating many search and web publications.  And do not forget “computing everywhere” with the proliferation of iPhones, RIMM’s and other smartphones, as well netbooks, which are constantly connected to the web with broadband wireless access. 

The bottom line is that video traffic and other broadband-chugging applications are exploding.

And, while traffic is exploding, the telco carriers in the United States, like most companies, went into the fetal position and decided to conserve cash.  Thus, they kept equipment purchases to the absolute bare minimum, utilizing whatever inventory they had before reordering. 

Thus, it was no surprise that Ciena had a weak first quarter and lowered revenue guidance for its fiscal fourth quarter to $190 million-$210 million.

But this inconsistency will not last long, as unemployment is stabilizing and the core of the financial system has become progressively unclogged. The amount of pent-up demand that has built up will mean an explosive uptick in fourth-quarter sales.

And Ciena, a less diversified and much smaller company than Corning, is bound to see its stock price appreciate over a long period of time, and by a much higher percentage. 

Ciena is trading at only one times book value.  And, despite its negative operating margins, the company has cut expenses, has a strong cash position of more than $900 million – enough to retire its entire long term debt and have almost $200 million left – and a much more flexible cost structure than in the past. 

Thus, the huge operating leverage to volume puts this stock in a superb position to take advantage of the exponential revenue growth that will “surprise” the markets once the telcos start buying Ciena’s products en masse.  Wall Street is asleep at the wheel on this one, with many negative views abounding.  But traders have already started covering shorts and some started going long.  And in the recent rally, Ciena has led very nicely, outperforming both the Nasdaq Composite Index and the Standard & Poor’s 500 Index by about 30% since March 9.

The stock has more than doubled since hitting its March low, and it’s still cheap.  But with a rally of this magnitude and the summer doldrums near, where investors take time off and tech equipment sales are typically are back loaded, it could be imprudent to buy an entire position here.

Recommendation: Buy half a position of Ciena Corp. (Nasdaq: CIEN) now and wait for a significant profit-taking correction in order to gradually edge into it (**).  With luck, we might be able to buy part of the second tranche between $8 and $9 a share.  Go play some golf this summer and hold for 12 to 18 months. 

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

 

 

 

(**) – Special Note of Disclosure: Horacio Marquez holds no interest Ciena Corp.

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By Horacio Marquez
Contributing Editor
Money Morning

There is a giant bonanza coming Corning Inc.’s (NYSE: GLW) way, and it’s going to start hitting the company’s bottom line later this year.

What’s more, there is tremendous upside for the company’s stock that is not yet reflected at all in Corning’s share price. Corning is already surprising everybody – maybe even itself – well before any of this upside has materialized into tangible results.

Corning just reported a first-quarter profit of 10 cents a share, doubling analysts’ expectations. And that’s just beginning. The company raised growth estimates for its LCD television unit, which accounts for about 45% of revenue, to 18% from 9%.

Corning also confirmed the massive inventory liquidation, which means all of the industrial buyers of the company’s products have depleted inventories. You see, the first rule of financial management for a company is to always carry the lowest levels of inventory and receivables possible, because they have to be financed. And when financing becomes extremely difficult (or even impossible) to obtain, like it did last year, the immediate response is to cut inventories and reduce financing to the absolute bare minimum. 

But Corning implied in its conference call and press release that inventory liquidation in the supply chain has run its course and that sales are actually starting to increase. 

In fact, sales of display technologies, that is, the combined glass volume of its own operations and Samsung Corning Precision Glass were up 4% over the first quarter of last year.  This is a result of continued strong sales of LCD TVs at retail levels, as well as the end of the supply chain inventory adjustment. 
We are now likely to see restocking and inventory build-ups, as stimuli plans are deployed around the world.  Hence, the pronounced dip that we’ve seen in Corning’s stock over the past year that was the product Wall Street’s doubts about the future has set the stage for a major rally.

Much like the endless upside of the high-tech boom of 1999 that was extrapolated by Wall Street to justify huge valuations, the inventory liquidations occurring in many high-tech industries were used to justify ridiculously low valuations in the current recession.  This was another bubble, but to the downside.  Let’s call it an “inverse bubble.”

I am strongly convinced that the conditions that underpin the global economy will keep improving because there are many powerful forces working in that regard.  We are not out of the woods by any stretch of the imagination, but we have to recognize that the “TED Spread” – the difference between the interest rates on interbank loans and short-term U.S. government debt – and many other measures of confidence in the global financial system keep showing sustained progress.

But the economic recovery isn’t the only thing working in Corning’s favor.

The Global Broadband Arms Race

The real upside for Corning is the “global broadband arms race.” 

Indeed, not a week goes by without us hearing that the United States ranks 15th out of the 30 countries that make the Organization for Economic Cooperation and Development (OECD) in broadband adoption. This is no joke.

But the competitive dynamics in this sector, which is of long-term strategic importance to every nation, point to a rosy future for Corning. Because the demand for the fiber-optic cable that Corning leads the world in manufacturing is about to take off.

Let me explain…

The United States already lags Europe in wireless: Many years ago I bumped into a British tourist in a train and he showed me the winning goal of his favorite soccer team in England on his mobile phone that he downloaded as we spoke.  That type of service was unavailable at a reasonable price for U.S. subscribers, but his internationally roaming phone, which charged him a fraction of what I was paying for my bread-and-butter service made me feel like I was in an emerging market. 

Today the penetration of wireless in Europe is more than 100%. That is, the Europeans have more than one wireless device on average. Likewise, a Chinese friend residing in Shanghai years ago bragged to me about how he could continue talking in elevators back in Shanghai, while in the United States his calls get dropped.  

In the meantime, our friends “down under” in Australia just launched the mother of all broadband plans: Australia is going to spend a full $31 billion on a new, super-fast National Broadband Network that will connect every home, school and business.  The Australian plan dwarfs the mere $7.2 billion allotted to broadband deployment in the U.S. stimulus package.

The gauntlet has been thrown down and the United States cannot stay behind. 

Broadband access is not only a convenience, but it’s a key piece of infrastructure that enables connectivity for the entire economy.  Lower broadband deployment, connection speeds and traffic volume capabilities, as well as higher prices, are a handicap for the U.S. economy as a whole.  It lowers productivity and it breeds inefficiency in one of the most crucial avenues of economy: The transmission of information. 

Whether we’re transmitting sound, images, video, or just plain data, without broadband, it all is for naught.

This handicap is a competitive disadvantage that the United States is giving away to other economies.  Of course, it is much easier and cheaper to lay the infrastructure in much smaller countries where most of the population is agglomerated in high concentrations in multi-family dwellings than in an economy characterized by urban sprawl and many rural communities.

Soon, I expect to see the United States step up to the plate as it did when the Russians launched Sputnik. The country cannot continue to ignore this technological gap. 

Though it doesn’t really matter which country is building its broadband information super-highways, Corning is the ultimate winner. The technological superiority of the company’s ClearCurve optical fiber cables eliminates much of the loss of signal that occurs when cables are bent. 

The firm’s forward price-to-earnings (P/E) ratio of 5.48 is evidence of the very gloomy estimates by analysts. But given the dynamics of the broadband market, the higher penetration, and revived financing, it is highly probable that current earnings estimates will be blown away easily. 
The stock has an upside of at least 60% to 70% to the $25 per share area in the next year or so.

Recommendation:  We are looking to buy Corning (NYSE: GLW) at market and hold it for at least 18 months (**).  So initiate a position today by buying one half of your total desired position, waiting to buy the rest (possibly even doubling up) if and when we see a correction in the markets.  We will follow up at a later date.

 (**) – Special Note of Disclosure: Horacio Marquez holds no interest Corning Inc.

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