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A broadband dark horse

When Nasdaq hits bottom, it’s time to buy smaller-cap stocks again.

For the past several months, I’ve been seeding the CU fund with bargain stocks mostly trading on NYSE. As you all know, the Nasdaq slide has snowballed out of the control of even Fed Chairman Greenspan’s rate cuts and President Bush’s retroactive tax cuts. In this climate, you’re better off buying large-caps at bargain prices and waiting for the market to hit bottom before venturing into more speculative markets.

I could probably continue bargain hunting for several more months. Microsoft is ripe for the picking. I like Cisco’s price and unbeatable position. And several other industry giants hang low enough for even small-time investors to pick a nice nest egg. But by the time you read this, Nasdaq will be ready to start its slow climb back up the mountain, and I want to get in on some of these small-caps before prices are too steep.

Regular readers know my small-cap formula, but it bears repeating. Pick the leader in a market that is about to boom, preferably one that has IPOed within the past year and whose stock has been through initial volatility–what I call a post-flipper. Because you know that if half of these plays do not work out, those that do must have twice the return of the large-cap stocks in the fund. You hang on to those that don’t work out in the short run (XYBR) and you sell the ones that do (AKAM).

The small-cap I’ve had my eye on lately is Alcatel (NASDAQ NM: ALAO), the French manufacturer of a variety of telecommunications equipment. Though many of its markets have taken a beating of late, there is one market in which it has an early lead–Fixed Wireless equipment for small-to-midsized businesses. As I will explain, I predict great things from this market. And because ALAO is seven months past IPO as you read this, it fits the post-flipper profile to a T.

We’ve been sweating and fretting about broadband at CU for years. The two dominant players–cable and DSL–have made slow and steady progress, but have plenty of bugs to work out before all but the early-adopting small-to-midsized businesses will feel comfortable using their services. Add to this the fact that the build-out of these services is slow to nonexistent in some areas, and there is a huge market for an alternative.

Two viable alternatives are satellite and fixed wireless. For a variety of reasons, satellite is a couple of years behind fixed wireless. If and when it catches up, it will only be attractive for really remote businesses. Suburban and small-town businesses will look to fixed wireless in the next couple of years because of its better reliability and performance (especially on upload) over satellite.

The two fixed-wireless solutions–Multichannel Multipoint Distribution Service (MMDS) and Local Multipoint Distribution Service (LMDS)–serve different markets. MMDS is designed for consumer Internet service in which several homes within a large radius share bandwidth. LMDS offers a stronger signal over a smaller radius and thus can offer a better solution to small-to-midsize businesses that want dedicated, 155-megabit speeds.

Although the U.S. market is a year or so away from big bids for Alcatel’s equipment, it has grown nearly 200 percent in developing countries that have lots of bandwidth needs, but little infrastructure. I expect that imbalance to continue for many years, as competition in the United States provides a barrier to acceptance. But it will grow here as well and, at the very least, raise the stakes for cable and DSL to accelerate their build-outs into remote areas. In any event, fixed wireless will grow faster than its competition because it is so much cheaper to build out than land-line solutions.

I’m bullish about a 40 percent annual return on my ALAO investment, and, if it works out, I’ll sell when the market is back up the mountain in mid-2002.

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