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Stock Strategist Industry Reports

These Networking Firms Offer Growth and Value

Some of these picks should see great long-run growth--others are too cheap to ignore.

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Shares of telecom equipment and data networking firms have been on a steady slide for the better part of a year, and they've taken a severe beating along with the rest of the market. The Dow Jones U.S. Telecom Equipment Index, which consists of familiar names such as  Cisco (CSCO) and  Motorola (MOT), as well as less-familiar niche vendors like Finisar (FNSR) and  Sonus (SONS), is down about 30% since August and has been cut nearly in half over the past 12 months. Near-frozen credit markets, a down-trodden U.S. economy and the threat of a protracted global recession have prompted investors to indiscriminately sell equities, especially those that face significant uncertainty in the near term.

The outlook for the telecom equipment and networking industries over the next few quarters isn't good. Telecom equipment vendors have been dealing with weak demand since 2007, and further deterioration seems likely, given the current environment. Demand for networking gear is also likely to be put on hold at many firms, as managers wait before spending. Many telecom and networking equipment firms have also relied on Asia and emerging markets to fuel growth recently, with a weak dollar further boosting revenues and cash flows. Unfortunately, the European economy is deteriorating and previously fast-growing markets such as China, India, and Brazil are quickly losing steam. Moreover, a stronger dollar will likely turn what had been a nice boost into a significant head wind.

Grady Burkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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