JDS Uniphase (JDSU) is having a terrific morning on Thursday as it has gained nearly 11%. When a stock breaks out like this, we always look for a catalyst for the move and in this case the primary reason seems to us to be an endorsement from Jim Cramer. We often cover Cramer’s Mad Money show on our blog because of this reason; he moves stocks, specifically stocks that he spends a fair amount of time on. There are small examples of the “Cramer Effect” all the time, but a recent example was when he discussed a bullish thesis on mining stock Freeport McMoran (FCX) and in the absence of any other news he created frenzied buying the next day. The stock finished that day with its largest one-day gain in history rising 11%. It appears that there is something similar going on with JDSU today.
“I’m telling you JDSU could be our next big win. It’s been a long road… We think it’s going to change now that the axe raised the price target to $8.50. JDSU is a leading player. Major exposures to the mobile Internet, the fabulous 3-d glasses, just to remind you they have a clear vision and it’s exciting and fun to watch. Getting better and better by the quarter.”– CNBC’s Mad Money 11/11/2009
Cramer spent more than 10 minutes of his extremely fast-paced show discussing the merits of owning JDSU. Among his reasons, the fact that JDSU makes testing equipment for telecom networks making it an important part of the “mobile Internet tsunami” that Cramer heartily believes in as an investment. The company claims nearly half of sales from testing and optical components for telecom, broadband and wireless networks.
Furthermore, enough time has passed to distance JDS Uniphase from what was a horrendous performance following the dot com bubble burst, and he admitted that the slump that ensued and nearly sunk the company soured Cramer on JDSU for a long time. He said the company had become a metaphor for the dot com era that was painful to tech investors. However, Cramer’s primary reason for turning positive on JDSU is the recent bullishness of Stanford Bernstein’s Jeff Evenson who has a terrific track record recently and has upped his price target to $8.50.
At Ockham, we like to juxtapose our long term valuation methodology against Cramer’s picks, and in the case of JDS Uniphase we are in agreement. We have viewed this stock positively since initiating coverage on it more than a year ago as Undervalued. Earnings have started to improve and have beaten estimate three of the last four quarters. With the bandwidth that new smart phones are hogging only expected to grow, we think a telecom network infrastructure play makes since and could make this stock an attractive takeover target. Even after today’s gains, the stock still sells for less than 2x book value and is currently far below its normal range of price-to-sales at only 1.2x.
Love him or hate him, you have to be aware of what Cramer is talking about. He can create situations that almost no other pundit, analyst or commentator can, and he does it on a fairly regular basis. That is the reason that we recap his show, so that investors are not left unaware of how he is affecting the market. In the case of JDSU, we have to say that we agree with this pick as we would expect the stock to trade in a range of $7 to $10.40, which suggest there could still be some upside.