If you want to make huge money in the stock market, you have to find situations where demand far outstrips supply. You have to identify cycles that can’t be stopped by a slowdown in consumer spending or an aggressive, pissed-off Fed that still thinks the economy’s booming. Wake up and smell the coffee, Alan! Right now there’s a cycle that just started raging throughout the country. It’s the demand for fast access to the Net through your plain old telephone or cable wires, and I don’t want you to wait until you see it yourself. That’s because by the time Bell Atlantic catches up to every other regional operator in this country, believe me, you will have missed the cycle entirely, and with it the big profits that come from catching one of these giant spending plays right in the kisser.
The dot-com world may have been revealed to be a sham and a crock and a fraud in the past few months – you will get no argument from me on that score – but don’t go damning the Internet industry itself. People who have tasted fast access to the Net, whether through T1 lines at work or through a neighbor’s cable modem, know that you simply can’t go back to even the fastest built-in modem on your personal computer. High-speed access to the Net may be the single largest individual-spending cycle I have ever seen, and a handful of companies are going to make fortunes in the next year, while the nation as a whole gets wired.
As we say at Cramer, Berkowitz, my hedge fund, it’s a money-in-the-bank cycle. Chances are, if you are reading this in the New York metropolitan area, you are thinking, “Man, this Cramer’s a total joker. I tried to get DSL” – the technical name for the product that accelerates your regular old copper wires so they are high- speed – “from Bell Atlantic, and it was sheer torture, not to mention extremely costly.” Join the club. Not until I trumpeted our own failed attempts to get DSL in Summit, New Jersey, in the cyberpages of TheStreet.com did we have any luck in getting high-speed access. We settled for a cable modem through Comcast, a fine alternative but not the one I wanted. The fast-access rollout in our region is neither fast nor, actually, much of a rollout at all!
My advice: Don’t be so parochial. Not all regional Bell operations are created equally badly. Both Qwest (formerly US West) and SBC Communications, which represent about half the country, are installing these devices literally around the clock and are determined to have millions of homes on high-speed lines by year’s end. Millions. That’s a heck of a lot of equipment that has to be bought. And if Bell Atlantic wakes up, it will just mean more equipment orders and an even longer cycle than we are betting on.
Who is making all the equipment? A handful of companies, many of which could report blockbuster quarters in the weeks ahead. First, several large players could benefit, including Nortel, Lucent, and Cisco. Mind you, these are giant companies with only a small portion of their earnings coming from the nationwide rollout, but it sure won’t hurt them. When we visited Cisco last week, we were struck by how important both the cable modem and the DSL rollout were to this great company, and we came away thinking we would be nuts not to play it. You tend not to see Cisco’s equipment in the home, as it is more for the office, but that is changing rapidly. A more direct play, one with a pastiche of telco offerings, is a French company, Alcatel, which makes a lot of the equipment that is being placed in people’s homes to make this work. We’ve bought into Alcatel and think it can ramp for several quarters because of healthy orders for these products. Call us jingoists; we aren’t big fans of foreign tech investing. But when it comes to telco, these Europeans aren’t so stupid.
Similarly, Efficient Networks, Paradyne, Aware, and Westell are getting huge orders and earnings from this rollout as they, too, cash in on the in-home technology. These outfits are a bit dicey because they have shorter track records than the majors, but they give you much bigger bang for the buck. Perhaps the biggest winners, however, will be the equipment you will never see, the stuff that’s getting jammed into those boring brick central-office Bell buildings that dot cities and towns all over the country. If they were ever to put a window in one of those buildings – they never do – you would see oodles of intelligent equipment being rolled in by Redback, which makes a subscriber-management tool that services all of the DSL accounts, and Copper Mountain, which makes the devices that intermix the voice and data lines. These companies are pure DSL plays, and they can be expected to thrive for quarters on end during this rollout. We love these guys. Finally, we have a couple of pure specs – Turnstone and Tollgrade – rockets that could produce beautiful fireworks but then fizzle the moment that the build-out nears conclusion. You need different equipment depending upon the quality of the lines and the distance your house is from the central office. These firms have equipment that tells the phone company what kind of line you have without their having to go to your house. This rollout is costing the Bells a fortune, and Turnstone and Tollgrade can save them a fortune. Caution, though, is needed. The major telco-equipment makers, such as Nortel, are gunning for this market, and it is only a matter of time before they undercut these two stock missiles.
Don’t ever believe the phone companies will get it right? Have more faith in your cable company? Then consider Broadcom, the semiconductor giant behind the cables’ rollout of their alternative to the phone lines. Broadcom’s a great company, but it just got added to the S&P 500, so let it come in a little before you take a shot at it.
Tempted by some of those little companies that are trying to squeeze between the Bells and you? Companies like Covad and Northpoint and Rhythms all advertise heavily that they can deliver DSL faster and better. Sure, you can go with their service – just don’t go with their stocks. The incumbent Bells have found a gazillion legal ways to make these companies’ installations a nightmare for their own profitability, or lack thereof. Not a good business. And how about the Bells themselves? These are giant companies leveraged to interest rates first and foremost, but SBC Communications has taken the leadership position in DSL, and we think it’s worth owning. In fact, it’s the safest play on the whole cycle, and one that won’t ever come back to haunt you.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had positions in SBC Communications, Nortel, Lucent, Cisco, Alcatel, Efficient Networks, and Copper Mountain, and a short position in Broadcom. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer’s writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at firstname.lastname@example.org.
This week’s “10 Questions” will be a Q&A with Eric Ritter, portfolio manager of the Driehaus Asia Pacific Growth fund, the top-returning Asia-Pacific fund of the past twelve months. It’s available free at www.TheStreet.com.