New momentum king gets fit with fiber
StockerYale spent most of 1999 trading for a buck or less -- under the radar of most market pros.
But this components maker is riding the fiber-optics craze to bright new highs in 2000.
By Jon D. Markman
You can't say Mark Blodgett didn't warn us. From last summer through winter, the sunny chairman of benighted
lighting manufacturer StockerYale (STKR, news, msgs) was buying thousands of shares of his firm at prices as
low as 42 cents a share in the open market -- more than 80% off the high they had set two years before.
Nine months later, the stock has ridden the mania for fiber-optic components stocks to
the top of the market -- racking up a 4,600% advance year to date, a figure that's more
than four times better than the new millennium's next-best momentum stock.
The remarkable journey from basement to penthouse for StockerYale -- which recorded
just $14 million in sales over the past 12 months, and a net loss of $1 million --
symbolizes the insatiable demand today for shares of component makers in the fast-growing fiber-optic
communications infrastructure space.
To many observers, this all looks much like the frenzy for Internet stocks a year ago, but with one key difference.
"The end opportunity is visible, real and understandable -- and that is the contrast from the dot-com craze," says
portfolio manager Peter Conrad, of Kopp Investment Advisors in Minneapolis. "Plus there is not an exponential
increase in supply because a lot of the companies are being bought up."
Under the radar and undervalued in '99
The opportunity for StockerYale at this time last year was certainly not visible to the naked eye. The New
Hampshire company had modestly prospered during the Cold War as a manufacturer of watches and compasses
for the U.S. military, as well as a maker of machine-tool fluorescent lighting systems. But not long after Blodgett
quit his corporate finance job on Wall Street in 1989 and took the firm private in a highly leveraged buyout, the
picture went dark. The suddenly shrinking Pentagon began to cut back its orders, and bank loan officers became
In an interview, Blodgett said he spent most of the '90s digging the firm out of debt. In 1996, he took the firm public
again via a reverse merger with a tiny Canadian company, and used the shares and spare cash flow to acquire
cheap fiber-optic assets to augment his illumination business. His first purchase was a small Canadian laser
maker that was a world leader in manufacturing phase masks, a critical piece in the creation of fiber Bragg gratings
(the brilliant component that turns a single beam of light into many, and which has been the engine of the recent
optical-networking revolution). His second purchase was six fiber "drawing towers" from a retrenching German
Blodgett’s dreams were slow to pay off, however, and his stock shattered like crystal dropped on cement. By June,
1999, StockerYale failed to meet two of the Nasdaq’s three listing requirements: minimum market capitalization
and net income. To keep the business afloat, Blodgett decided to kick away his last prop -- the tangible assets
represented by a machine-tool plant -- and suffered the humiliation of being delisted from the exchange. On Dec.
30, his largest institutional shareholder dumped thousands of shares on the market, and the stock hit a low of 39
cents a share in Bulletin Board trading.
All this time, Blodgett was a buyer, he said, "because I recognized we were totally undervalued. The market didn't
realize that we were a player in phase masks, and that we had more fiber-optic products coming." In January, the
firm announced that its Canadian subsidiary, Lasiris, had invented and begun selling a phase mask that was light
years ahead of competitors -- and the stock jumped 557% in three weeks. In February, Bloomberg reclassified
StockerYale as a fiber-optic components maker, and traders looking for the next big idea in the optical-networking
food chain apparently deemed it a value play -- an event that conspired with other factors to send shares up another
400% in three weeks.
The stock is only up another 80% since March -- when it regained its Nasdaq listing -- but the research director at
a large money-management firm that has owned the company’s equity for half a decade said he is not inclined to
sell out yet. One reason: Consolidation in the industry has swelled the buying power of phase-mask and fiber
clients like JDS Uniphase (JDSU, news, msgs), Corning (GLW, news, msgs) and Alcatel (ALA, news, msgs)
"StockerYale's customer base is very high quality, and as they ramp up their capabilities they'll be doing a lot more
business," said the manager, who declined to be named. A portfolio manager at Trainer Wortham, a New York fund
that reported holding 212,000 shares in its June 30 report to the SEC, likewise declined to be named but said he
thinks "it's a good long-term story."
On Wall Street, "long term" can last about 30 minutes if a company doesn't deliver the goods, but StockerYale has
finally begun to show respectable sales growth. Net sales were $10.4 million in the six months ended June 30, up
53% from the comparable 1999 period. The increase was largely due to higher sales of laser and optical products
as well as some increase in sales of machine-vision lights. Blodgett notes that the firm has an impressive 150,000
square feet of manufacturing space in which to expand operations, and says the firm's next big growth phase will
stem from its specialization in making high-end fiber used inside optical-network equipment. The two main
manufacturers of this photosensitive, or erbium-doped, cable today are Lucent Technologies (LU, news, msgs)
and Corning -- and they can barely meet their own demand for it, with little left over for competitors.
A buy for the risk-taker
So is it a buy? Only for extreme risk-takers as part of a diverse portfolio, and even then with a tight stop. Chrystyna
Bedrij, an analyst at Griffin Securities in New York, said that StockerYale primarily benefits from "hot sector
overflow" -- the phenomenon of too much money chasing too few stocks. "Investors are awed by the size of the
market opportunity and confounded by the shortage of viable public investment vehicles," she said.
The most likely endgame, most analysts agree, is a merger with a much-larger components player. JDS Uniphase,
Corning, Lucent and ADC Telecommunications (ADCT, news, msgs) have been gobbling up smaller
manufacturers left and right with prices at staggering multiples to revenue as they each race to become a one-stop
shop for end users like Nortel Networks (NT, news, msgs), Cisco Systems (CSCO, news, msgs) and Ciena
(CIEN, news, msgs).
But Blodgett, who owns 48% of the firm's roughly 8 million shares, says he plans to forge ahead with new products
and has no plans to sell out yet. He notes that SDL (SDLI, news, msgs) was a sleepy manufacturer of industrial
laser pumps in 1998, poking along with a market cap around $300 million. It's advanced about 10,000% since then
and agreed to a $41 billion merger with JDS Uniphase. The market for phase masks and specialty fiber is nowhere
near the size of SDL's market, but there's no telling how far emotional investors will push these names. After all,
Corvis (CORV, news, msgs) already has a market cap today larger than General Motors (GM, news, msgs), and
it has yet to record substantial revenue; New Focus (NUFO, news, msgs) has a market cap of $8 billion on trailing
12-month sales of $18 million; and LightPath Technologies (LPTH, news, msgs), has a market cap of $937
million on $1 million in annual sales.
"If you thought investors were nuts last fall with Internet stocks, wait until you see what happens this year with
these opticals," said Terry Bedford, a fund manager in Toronto who's skeptical of the industry's fundamentals but
willing to make a buck on the euphoria. "Just make sure you learn the lesson of March and April, and don't get left
holding the bag when the bubble bursts."
The Nasdaq Composite ($COMPX) soared 12% in August -- its greatest boost for the month in history. Hope that
little downdraft at the end of July didn't scare you out of your stocks since the terrific move was predictable. As I
noted in my July 19 column, "Slaying the myth of the summer stock slump," most summers in the past decade
and a half have been rock-solid -- though this one, so far, is off the charts. . . . The warmer weather has been kind
to our SuperModels. The 20-stock Year-Trader 2000 portfolio was up 25.2% in aggregate through Aug. 31 despite
owning five stocks that are down 69%, 66%, 46% and 32%. . . . . The best models are Redwood Growth, whose
six stocks are up 66%, and MVP Growth, whose seven socks are up 54%. . . . Our 10-stock monthly HiMARQ
portfolio is down 14% this year but it came through in August, this time with a 19% advance; five stocks were up
more than 25%. Our benchmark, the S&P 500 ($INX), was up 7%. . . . It's time to rebalance our two monthly
portfolios. The HiMARQ, in which we include stocks that have historically outperformed the market in each
individual month, will contain the following: Myriad Genetics (MYGN, news, msgs), up 32% on average and 4-0 in
Septembers; BEA Software (BEAS, news, msgs), up 29% and 2-1; Metricom (MCOM, news, msgs), up 25%
and 5-3; Learning Tree International (LTRE, news, msgs), up 22% and 4-0; Flextronics International (FLEX,
news, msgs), up 20% and 5-1; RadiSys (RSYS, news, msgs), up 19% and 4-0; Gemstar-TV Guide
International (GMST, news, msgs), up 19% and 4-0; MRV Communications (MRVC, news, msgs), up 18% and
5-2; Paychex (PAYX, news, msgs), up 14% and 10-0; and JDS Uniphase (JDSU, news, msgs), up 13% and 6-0.
The S&P 500 is up 0.8% in Septembers, and 5-5 in the past 10. . . . The Flare-Out Growth MonthTrader portfolio,
down 53% for the year, gained 21% in August; the two leaders were Network Appliances (NTAP, news, msgs) up
36%, Check Point Software (CHKP, news, msgs) up 26% and Scientific-Atlanta (SFA, news, msgs) up 1%.
The new names are Newport (NEWP, news, msgs), Power-One (PWER, news, msgs) and Check Point
Software. . . . Read more about StockerYale and its industry at Business.com or in its most recent 10K report to
the SEC. Track its institutional investors at Lionshares.com. Learn all about FBG manufacturing tools at the Web
site of its Lasiris subsidiary. Where else could you buy a phase mask with an ultra-small residual chirp level less
than 5 picometers? To buy a genuine StockerYale military-issue watch, visit this site or this one.