A 13G filed with the SEC has disclosed that Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, owns 5.2 million shares of Ciena Corporation (NASDAQ:CIEN), a $1.7 billion market cap communications equipment and software company. This comes out to 5.1% of the total shares outstanding. We track quarterly 13F filings from hedge funds such as Citadel as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an excess return of 18 percentage points per year), and so we can see that the fund had only about 1 million shares in its portfolio at the end of December 2012. So the overwhelming majority of Citadel’s position has been purchased in the last two and a half months (see more of Griffin’s stock picks from the 13F).
The largest holder of Ciena Corporation shares in our database belonged to Platinum Asset Management. Platinum, which is managed by billionaire Kerr Neilson, cut its stake by 7% during the fourth quarter of 2012 but still owned 6.7 million shares of the stock (find Neilson’s favorite stocks). Billionaire George Soros reported a large position in Ciena’s debt, while Mariko Gordon’s Daruma Asset Management disclosed ownership of 2.2 million shares (though this was down considerably from the end of September). Research more stocks Daruma owned.
Results from the 10-Q was particularly good news as Ciena Corporation had been struggling with profitability in recent quarters and had previously guided numbers down for the current year. Current analyst expectations for the fiscal year ending in October 2014 imply a forward P/E of 19. This suggests that Ciena will have to continue beating expectations or be in a strong growth position at that time. We think it’s notable that the most recent data- from the end of February, before quarterly results were released- show 31% of the outstanding shares held short. Short covering may have helped fuel the rally in the stock price. We would also pay attention to the fairly high beta of 2.3.
How does the company compare with its peers?
Ciena’s peers include Alcatel Lucent SA (NYSE:ALU), Cisco Systems, Inc. (NASDAQ:CSCO), Ericsson (NASDAQ:ERIC), and JDS Uniphase Corp (NASDAQ:JDSU). Alcatel-Lucent and JDS have also not been very impressive in terms of their bottom line, and also carry betas above 2. Revenue numbers have not been particularly good at these two companies. The sell-side is more optimistic on JDS Uniphase, as its forward earnings multiple is roughly in line with Ciena’s, but we’d still avoid both stocks. Ericsson is also expensive in terms of its trailing earnings, but analyst consensus is that the company will improve strongly and as a result it trades at only 14 times consensus earnings for 2014. Still, its numbers at least on the top line have not been particularly encouraging. If there is a conventional value stock in the lot it’s Cisco, which posts a trailing earnings multiple of only 12 and whose business seems quite healthy judging by results in the fourth quarter of 2012. We think that it’s at least a good place for investors to start.
Last quarter was quite a good one for Ciena, but even if we annualize the adjusted earnings per share we do not get a particularly cheap stock. We would at least need to see the company sustain its recent results for another quarter or two and show that last quarter was not an anomaly.
Disclosure: I own no shares of any stocks mentioned in this article.
