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News Analysis date published New: 
Wednesday, January 29, 2014 - 10:00
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Wednesday, January 29, 2014 - 10:00

Expect This Former High-Flier To Outperform Again

Wednesday, January 29, 2014 10:00 AM

I couldn't believe my eyes when I read the name of the company whose stock ticker triggered a buy alert on my quantitative stock screener.

My first thought was, "Didn't these guys go out of business in the technology stock crash at the turn of the century?" Next, memories of my professional day-trading career came flooding back.

This was the same company with which more than a few friends of mine earned over $100,000 a week for weeks on end, trading in and out of the stock by using insane amounts of leverage and proprietary trading firm capital. I don't want to name any names, but suffice it to say that several of these gentlemen went on to become successful hedge fund managers. Others used their massive good fortune to open a variety of businesses, but unfortunately, several went broke during the tech bust.

Needless to say, this company was the darling of both investors and short-term day traders during the high-tech boom years of the 1990s. This stock provided huge trading volume and monster volatility on a daily basis. These factors, combined with virtually unlimited leverage, is how numerous day traders made their fortunes during the glory days of the late '90s.

Today, one of these firms merged with a French company that is regaining traction in the global marketplace. I think it will make an ideal high-tech investment for 2014. I'm certainly not forecasting anything like a repeat of the dot-com boom -- but I do expect this stock to at least double in price over the next year.

Veteran day traders may already know the company I'm talking about: Alcatel-Lucent (NYSE: ALU).

Trading under the ticker symbol LU, Lucent was the day traders' favorite stock during the tech boom. Soon after the crash, the telecom faded from sight only to emerge in 2006 after a merger with French telecommunications equipment maker Alcatel. The merged company is based in Paris and traded on the New York and Euronext stock exchanges.

Alcatel-Lucent is perhaps best known as being the owner of Bell Labs, a world-renowned technology research facility that holds over 33,000 patents and 15,000 patent applications, and counts seven Nobel Prizes among its researchers.

The company boasts a market cap of just over $9 billion, revenue of $18.9 billion and a gross annual profit of just over $5.7 billion -- but make no mistake, this company has struggled over the past several years. A negative operating cash flow of over $826 million (and a net loss of just over $3 billion and a diluted loss of $1.35 a share) makes that abundantly clear.

However, 2013 marked a turnaround for this once-mighty tech giant. Alcatel-Lucent ousted the previous CEO and appointed Michel Combes, who brings more than 20 years of hands-on experience in telecommunications.

The decision to sell its LGS Innovations satellite communications unit to a group of private investors and the expected sale of its enterprise unit are both steps to cut costs and streamline operations. All in all, the company expects to sell off $1 billion worth of assets.

While substantial moves are being made to improve the bottom line, I am most excited about Combes' "shift plan," which will focus the company on ultra broadband and IP networking. Alcatel-Lucent will be focusing 85% of its substantial R&D budget on these niches by 2015.

That focus may result in revolutionary changes in the industry, with Alcatel-Lucent leading the way rather than being a struggling has-been. Along those lines, the company is working with China Mobile (NYSE: CHL) to install a 4G network in that country and with Qualcomm (Nasdaq: QCOM) to develop small cell base stations to boost wireless connectivity.

The market has reacted positively to the changes over the past year at Alcatel-Lucent. ALU climbed from around $1.50 to more than $4.50 last year, a more than 200% increase. However, this month's market sell-off knocked shares off their highs. The price broke the 50-day simple moving average before finding support at $3.80. (The bounce higher is what alerted me to this company initially.) Additional technical support exists at $3.60, $3.20, and the 200-day simple moving average of $2.90.

Risks to Consider: Alcatel-Lucent has a long way to go to get back to solid profitability, but it's on the right track. If the company sticks to its plans and the economy continues to rebound, ALU should climb, too -- but not in a straight line. Should the company deviate from its plan or the economy take a step backward, all bets are off. Always use stop-loss orders and diversify properly when investing.

Action to Take --> The current weakness in ALU's price has opened a buying opportunity. The way to approach this stock is to use dollar-cost averaging to build a full position. In this strategy, investors would buy shares now and double their positions if shares were to drop to support at $3.60. They would spend the same amount on ALU again if it hits $3.20 on the downside. Stops right below $3 should prevent further losses if the price continues to fall. I firmly think shares could climb above $7 within the next 52 weeks, so giving this stock a chance to gain traction again while building a full position makes solid investing sense.

P.S. Alcatel-Lucent is based in Paris, but just because a company isn't based in the U.S. doesn't automatically mean it is a "risky" growth stock. In fact, if you're ignoring overseas markets, then you could be missing out on some of the market's biggest income opportunities. All told, we've found nearly a thousand companies that pay yields of 6% or more -- including nearly 100 that pay twice that. That's why we've created a special report that tells you everything you need to know about international high-yielders -- including the names and ticker symbols of some of our favorites. Click here to learn more.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.