Harmonic Gains

01/28/2005 12:00 am EST


Michael Murphy

Former Editor, New World Investor

In our recent annual Top Picks for 2005 report, Michael Murphy chose Harmonic, and in just three weeks, the stock has soared some 50%. Is it time to sell? Here, Mike offers our readers an update on the stock as well as some additional favorite ideas.

"What a great quarter for Harmonic (HLIT NASDAQ). As I had forecast, Wall Street was way low on its estimates. Harmonic, which makes digital video systems and fiber optic systems that enable network operators to provide a range of interactive and advanced digital services, reported record sales for their December fourth quarter. Their 19% growth rate forecast snuck up to 21% before the pre-announcement, but Harmonic's guidance blew them away. Before the January 13th announcement, most analysts were looking for $0.10 to $0.12 per share, and Harmonic reported $0.17. While the company is being coy about the second half, I don't see why it would be less than 25% growth. That would bring them in at $170 million for the second half and $320 million for the year, about 29% growth overall. I certainly wouldn’t sell the stock on a long-term basis. However, given the sharp rise in price, I have no problem with anyone wanting to take some short-term profits in Harmonic. personally, however, I wouldn't sell more than half. I'm raising the target price to $15 for 2005."

Meanwhile, here are some highlights of some other current favorite stocks on Murphy's buy list:

"UTStarcom (UTSI NASDAQ) is a broad-based worldwide telecom equipment business, a major participant in the Chinese market, and a key supplier to Yahoo Broadband in Japan. The stock is recovering from its drop after announcing the acquisition of the handset division of Audiovox. Even though the acquisition increased the value of the overall company and its earnings, the stock got creamed. UTSI will survive this setback as they continue to introduce interesting new products and book contract wins. Meanwhile, we forecast a massive transfer of US companies to Chinese hands beginning in 2005 and UTSI is one company very likely to be acquired. I have raised the UTSI buy limit to $22; my target is $40 a share.

"Zhone Technologies (ZHNE NASDAQ) is in the attractive Internet access market (connectivity) and benefits from the proliferation of voice, video and data (convergence), but the stock has no sponsorship on Wall Street yet. Zhone should be profitable in the current quarter, which I think will generate the first buy recommendation sometime in early 2005. History tells us that when a company gets that first buy recommendation, the stock pops. As the Bells accelerate their fiber build-outs and the cable companies respond, the company's sales to both combatants will increase. We continue to rate ZHNE a buy under $5 for a target of $8 a share.

"Nanotechnology is still in the research stage, although we’re starting to see some products in addition to air bag sensors and Dockers stain-resistant pants. Nanofilm sunglasses, ski wax, cosmetics, tennis balls and racquets are on the market. It’s still best to own the companies selling the picks and shovels in this gold rush, and we are well positioned with Veeco (VECO NASDAQ) in hardware and Accelrys (ACCL NASDAQ) in software. Veeco remains depressed by its semiconductor equipment market exposure, even though its nanotechnology tools like their atomic force microscopes continue to sell well. Because I think we are close to a turn in investors’ perception of equipment sales in 2005, VECO is a very timely buy at current prices. Buy under $24 for my $33 target. Accelrys, in its first year as an independent company, continues to expand its nanotech simulation software offerings. Already a leader in modeling and simulation tools for nano-scale research, they are integrating cutting edge software with lab bench management tools. Integrated product suites should help cement Accelrys as the software provider for molecular-scale researchers of all stripes in 2005. Buy ACCL under $9 for my $15 target."

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