Long Idea Highlights From 2018

Our Long Idea reports aim to identify firms that, despite market fears, unimpressive GAAP earnings, and other noise, have profitable businesses and highly undervalued stock prices.

Last week, we examined our worst Long Idea picks from 2018. This week, we’re taking some victory laps and looking at our picks that outperformed in a down market last year. These are the Long Idea highlights from 2018.

Highlight 1: Oclaro, Inc. (OCLR) – published January 17 – closed April 5: Up 39% vs. S&P down 6%

Our first Long Idea of 2018 was also our best performer. We felt that the market was underrating the value of Oclaro’s first mover advantage in 100 gigabit/second optical transmission components. We argued that, even if margins declined from their record-high levels, Oclaro had enough growth opportunities to make up for the decline.

We also touted the stock as a potential acquisition target, writing:

“OCLR’s cheap valuation could make it an appealing acquisition target. A number of larger names in the industry might jump at the chance to expand their 100 Gbps capability at a discount. The most rumored names are Finisar (FNSR) and Lumentum (LITE).”

Our thesis was vindicated in less than two months when Lumentum (LITE: $46/share) announced that it would buy Oclaro for $1.7 billion, a 25% premium to its valuation at the time. We kept the position open for another month, in hopes that a bidding war would materialize, but we eventually closed the position on April 5 for a 39% gain.

At the time, we said that the acquisition was positive for LITE, but that its valuation was too expensive for us to recommend the stock. However, LITE has dropped 25% since then due, in large part, to fears over slowing iPhone sales – Apple (AAPL) is LITE’s largest customer and accounted for 30% of revenue in 2018. As a result of this cheaper valuation, LITE now earns our Very Attractive rating.

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Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, sector or theme.

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