Fly on WallStreet

Telecommunications companies have had some rough times over the last five years or so. During the '90s, when things were good, the telco's began using their profits to build out high-capacity, long-haul fiber networks. When profit's began to dry up, and WorldCom and the others fucked everyone, a shit ton of debt was issued by the telco's to fund the remainder of their fiber build-out projects. The stocks suffered tremendously as interest expense from all that debt started out pacing earnings growth. On top of that, demand for bandwidth didn't grow as fast as originally expected.

The day is finally here where the traditional T-1 just doesn't cut it. Jeremy is right. It is all about "the last mile." Fiber only goes so far. Typically, fiber is handed off to the customer site as Ethernet. Companies whose products make that fiber to Ethernet conversion are about to see a great increase in demand. ADC Telecommunications (ADCT) makes carrier-class media converters, and they also have exposure to wireless and broadband access. The stock has traded basically flat since the bubble, and as demand for products in all of their segments increases the stock should be able to rally.

The telco's are finally starting to make money again. As their customers increase their bandwidth requirements, the telco's are able to charge more for their services. The best part is that fiber optic technology is increasing the amount of data that can be pushed down each strand of fiber. Wavelength-division multiplexing effectively channelizes the fiber strands allowing for the transmission of ridiculous amounts of data. The telco's will be able to charge more and more for these high bandwidth services without the need to expand their infrastructure which should result in margin and earnings expansion. LVLT and Q come to mind as good speculative plays in this arena. Disclosure: I have a small position in Q. This sector is ripe for M&A activity. Small regional carriers are going to find it more and more difficult to compete with the nation-wide networks, and the big boy's have an easy way to expand their footprint via the takeover. Not to mention the fact that it is probably more cost effective for one provider to buy the other as opposed to building out a parallel network. These small telco stocks benefit from both the increase in margin and earnings due to bandwidth hunger, and from the premiums often paid these days in buy-outs. CHTR is one I've had my eye on for a while. They have had a decent run over the last couple months, but I wouldn't be the least bit surprised to see a Qwest or Verizon try to swoop them up. Who know's, maybe we can get greedy and hope for a bidding war. There are tons of other smaller service providers out there, but I'm lazy. Go to hell. Do your own DD.

I'm looking forward to being fired. It has been fun. Jessica Alba is hot.