2011 is turning out to be a LEAP year

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Chart: CNNMoney

Usually, being the 8th largest player in a highly competitive industry dominated by a handful of giants is not a good thing. And then there’s Leap Wireless.

Leap, which owns the Cricket service, has soared in the past week as investors seem to be betting that it could be the next carrier to get acquired. The stock has shot up nearly 30% since AT&T announced its plans to buy T-Mobile last week.

Investors need to be extremely careful. While there has been other good news to help push the stock higher — such as the announcement of a roaming deal with 4G network LightSquared and an upgrade by a Baird analyst — the move in LEAP looks like a classic case of the parlor game Wall Street traders love to play anytime there is a big merger. Who’s next?

Leap could very well wind up in the arms of Verizon or Sprint. Both might want to strike soon now that AT&T just gobbled up Dwayne Wade’s favorite phone company. But what if Sprint and Verizon don’t go shopping … or worse, decide to buy another smaller carrier like U.S. Cellular or MetroPCS instead?

It’s never a good idea to buy a company just because it might get taken over. It’s even more foolish when said company is already a small player in an industry that’s notorious for price wars and low profit margins. If Leap remains independent, how can it really hold its own against the wireless wonders of the world?

So if you’re considering buying a wireless stock, I strongly urge you to look before you LEAP. — Paul

Has Cisco hit bottom?

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Chart: CNNMoney

Don’t look now but Cisco is on a tear! Ok. That may be a stretch. The stock is up about 3% in the past four days. But the mere fact that Cisco’s stock is riding a four-day winning streak is worth noting.

Cisco hit a 52-week low on Thursday. It is a stock that investors love to hate this year. It’s no longer the super-sexy growth company it once was. Upstarts like Juniper and F5 have stolen its thunder in that department. But the company announced on Friday that it would soon pay a 6-cent per share quarterly dividend.

And that got investors mildly excited. Some shareholders have been clamoring for John Chambers to start parting with some of Cisco’s mountain of caysh for years. Cisco had resisted, using the time-honored excuse that many other techs with squeaky-clean balance sheets have, namely that they have better uses for their money than doling out quarterly checks to the widows and orphans crowd.

But Cisco may not have better things to spend that caysh on. The thought of Cisco taking on another acquisition probably scares most investors since Cisco has already been a shopaholic: Linksys, Scientific-Atlanta, WebEx, Pure Digital (owns Flip) & Tandberg — just to name a few.

So now Cisco has made the bold step to admit it’s a mature blue chip company. And instead of shying away from that, it might be something to embrace. Cisco’s dividend works out to 24 cents a year, a yield of 1.4%. That’s not too shabby for a first-time payout.

I’ll probably look more at Cisco in tomorrow’s Buzz over on CNNMoney proper. But definitely would love to hear some thoughts from Tumblr followers here. Has Cisco bottomed and are better times ahead or is it still going to be dead money for a long time? — Paul

Cell towers are ugly. So are the stocks.

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Chart: CNNMoney

Even when companies go out of their way to make cell towers look less like eyesores and have them blend into the landscape naturally, they are still pretty darn ugly. Now their stocks are ugly too.

Shares of American Tower, Crown Castle International and SBA Communications got shellacked Monday following Sunday’s news of AT&T buying the U.S. assets of T-Mobile. But is it an overreaction?

Clayton Moran, an analyst with The Benchmark Company, says investors might be overdoing it a bit. He argues that even if the FCC approves the marriage of Ma Bell (aka The House of Orange) and the wireless company that Miami Heat star D-Wade loves so much, it will take years for this deal to have a financial impact. Even then, it may be minimal.

Moran argued that the reason for the big sell-off was that investors just simply didn’t expect the news. They had gotten spoiled into thinking that a deal for T-Mobile may never happen and that the tower companies would continue growing like weeds (speaking of ugly) as the four major wireless firms (Sprint Nextel being the other) tried to one-up each other with newer, faster services.

The tower company stocks had been on a tear for the past few years. As 3G begat 4G, that meant more business for American Tower, Crown Castle and SBA from Verizon, AT&T, Sprint and T-Mobile.

"This is a sector that had little operating risk and had been growing for years while rarely facing any challenges," Moran said.

Still, the knee-jerk dumping of the tower stocks may not be completely illogical. After all, fewer competitors means more bargaining power on price for the wireless carriers. Oppenheimer telco analyst Timothy Horan said in a note Monday that AT&T will be adding 7,000 towers owned by T-Mobile.

That, he said, could give AT&T more leverage in negotiating new deals with the tower companies. And that could very well hurt their revenue and profits down the road.

It usually is never good news for consumers when an industry already dominated by a few giants gets smaller as one colossus decides to eat another. And in this case, it looks like consumers across the board, cell phone tower owners as well as individual wireless subscribers, could wind up as losers. — Paul

Gravity always wins

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Chart: CNNMoney

Yes, Thom Yorke wasn’t singing about tech stocks in Radiohead’s classic Fake Plastic Trees. But he might as well have been.

Finisar is getting annihilated Wednesday after warning that a slowdown in Chinese demand for its networking equipment will hurt revenue and profits in the next quarter. Fellow hot optical stocks such as JDS Uniphase and Oplink Communications sunk on the news as well.

It all just goes to show how fickle momentum is. I wrote about Finisar, JDSU, Ciena and other muy caliente tech stocks earlier last month. In that column, I said  “many of these stocks may have run up too far too fast and are due for a pullback. Investors rightfully should be worried about drinking the tech Kool-Aid again so soon after the last bubble.”

Even though Finisar and many other networkers were not trading at valuations as ridiculous as 1999, a company whose stock is on fire will ALWAYS be subject to a big drop if it can’t meet the insane expectations of Wall Street.

That’s something that investors in BroadSoft, the latest tech stock flavor of the month that I Tumbld about yesterday, have to keep in mind as well.

That’s the funny thing about gravity. The fall hits you in the face really hard even when you expect it. — Paul

The best tech stock you’ve never heard of

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Chart: CNNMoney

There are plenty of tech stocks that soared on their first day of trading only to come crashing back to Earth after the IPO euphoria faded. BroadSoft is not one of those tech stocks.

The company, which makes software that helps telecom carriers transmit calls over the Web, went public in June 2010 at a price of $9 a share. That was at the low end of the company’s $9 to $11 offering range. The stock then fell nearly 8% during its debut, closing at $8.30. Many people quickly wrote off the company. That would have been a huge mistake. 

Nine months later, BroadSoft is now trading just below $50 a share. That’s a gain of almost 500%. The stock surged nearly 40% alone on Tuesday on the back of an incredibly strong earnings report.

BroadSoft, whose customers include most of the big phone companies like Verizon and Sprint, said Monday after the closing bell that sales in the fourth quarter soared 85% from a year ago. The company posted a profit of about $11 million, up from earnings of less than $400,000 a year earlier.

This growth is obviously impressive. But can BroadSoft possibly keep climbing from here? Brent Bracelin, an analyst with Pacific Crest Securities in Portland, Ore., thinks so.

Bracelin notes that only a small percentage of corporate telephone lines have been converted from legacy time-division multiplexing (TDM) switches to the software that makes Voice over Internet Protocol or VoIP possible. He estimates that just 4 million of 62 million business lines have shifted from TDM to IP.

"The excitement is less about what BroadSoft is doing today and more about how many more lines BroadSoft’s customers have yet to transition," he said.

A valid point. But investors probably have reason to be a little nervous.

The stock now trades at nearly 90 times 2011 earnings estimates. If that kind of valuation doesn’t hark back to the tech bubble days of the late 1990s and 2000, I don’t know what does.

Bracelin thinks BroadSoft is a good bet for the long haul. But he concedes that BroadSoft is likely to be a stock that traders will feast upon, increasing the chance that it will be insanely volatile in the short-term. 

And for what it’s worth, short interest (the number of shares held by investors betting the stock will go down) was about 1 million shares as of mid-February. That accounts for about 9% of the total available shares outstanding. Not an insignificant amount.

Today’s move may attract even more BroadSoft bears. A user on StockTwits going by the name of ninanina65 commented that BSFT is the “short opportunity of a lifetime NOW at $50.” That may be a stretch.

Gilad Shany, an analyst with Baron Funds in New York, noted that just because a stock goes up sharply doesn’t mean it has to be overvalued. He said that small cap stocks, particularly ones that are relatively undiscovered, can move dramatically on good news. BroadSoft is a holding in the Baron Opportunity fund.

“When a stock moves so quickly, you do have to stop, think and reassess the investment thesis. But we still like the fundamentals,” Shany said.

But now that BroadSoft has graduated from IPO dud to tech stock stud, the pressure will be on to keep beating earnings and sales estimates by a wide amount. With a stock that’s priced for perfection, it may be a rocky road for BroadSoft in the coming months.  — Paul

Cisco and AOL don’t party like it’s 1999

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Chart: CNNMoney

If you still think that AOL and Cisco are sexy momentum tech stocks, then you are living La Vida Loca. Seriously, this is no longer 1999. Ricky Martin, or for that matter Lou Bega (anyone remember Mambo No. 5?) is no longer all that popular. And neither are AOL and Cisco.

It’s been a stunning fall from Wall Street grace for both companies. Sure, Cisco is hardly irrelevant. The company is still in the Dow after all. But it hit a new 52-week low Monday and investors are seriously starting to wonder what CEO John Chambers has up his sleeve to juice growth prospects again.

Should Cisco use some of its cash (pronounced “caysh” for those who love to imitate Chambers) on more acquisitions? Or has Cisco already grown so large that now’s the time to downsize?

I wouldn’t completely throw in the towel on Cisco just yet. Yes, it clearly looks like a mature company but you can say the same for IBM and shares of Big Blue have continued to do quite well. Cisco is dirt cheap. It’s trading at 11 times earnings estimates for this fiscal year. It has a pristine balance sheet.

AOL, on the other hand, is something that investors may want to avoid. Accuse me of sour grapes if you like. I did after all live with AOL acting like an anchor on the TWX position in my 401(k) for several years before CNNMoney owner Time Warner mercifully spun this puppy off.

But AOL, much like Yahoo, a company that it is inextricably linked to in merger speculation, seems to be struggling from a lack of a cohesive strategy.

AOL has been buying lots of content companies. But for all the hype that the purchase of sites like TechCrunch and HuffPo generate amongst the navel-gazing media, investors could care less.

AOL still isn’t growing. Earnings are expected to fall in 2011 and 2012. Sales are dropping too. Simply put, it’s going to take a lot of ad growth from the likes of HuffPo and other AOL brands to offset the slow bleed that is AOL’s subscriber business.

Despite all that, AOL trades at a premium to Cisco. It’s valued at 17 times this year’s profit forecasts. Not sure that makes sense. Cisco has its share of problems. Upstarts like Juniper and F5 are starting to eat its lunch. But at least Cisco has a viable business model.

Cisco may never get back to the prices it traded in those halcyon days before the tech bubble burst. (Remember when people thought it would be the first company to be worth $1 trillion?) But Cisco still looks a trillion times smarter of an investment than AOL. It’s better to be a mature company than a company without a clue. — Paul

Hey! You! Get on to my cloud!

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Chart: CNNMoney

Let the frenzied merger speculation begin! Shares of cloud computing companies Savvis and Rackspace Hosting both popped Wednesday as traders bet that they may be the next takeover target in what’s quickly emerged as a very active subsector in tech.

Two of these firms’ competitors are in the process of getting gobbled up. Verizon started things off last week by announcing it was buying Terremark for $1.4 billion. That deal valued Terremark at a juicy 35% premium.

Not to be outdone, Time Warner Cable struck a deal Tuesday afternoon to buy NaviSite for $230 million, 33% more than where NaviSite’s stock closed yesterday.

We’re one purchase away from being able to dub this a trend, but clearly investors are excited about the possibility of Savvis or Rackspace succumbing to the urge to sell out.

In the copycat world that is big tech, would it be a huge shock if someone like Verizon and Time Warner Cable competitors AT&T or Comcast — or for that matter firms such as Microsoft, Dell, IBM or HP — wanted to make a play for Savvis or Rackspace? Probably not.

Still, playing the Wall Street parlor game of Who’s next can be lucrative if you pick the right horse. But it can be disastrous if you wind up with a company that remains independent. Sometimes a firm refuses to sell out due to sheer management stubbornness. Other times, it’s because those companies just weren’t worth attracting the attention of a larger suitor in the first place. 

So investors have to be extremely careful to not get stuck with, uh, their heads in the clouds. — Paul