Analyst names stocks to buy ahead of optical sector 'super cycle'

Declaring that the optical components sector is on the verge of a "super cycle," research firm Needham upgraded four stocks in the space to Strong Buy from Buy: NeoPhotonics (NPTN), Oclaro (OCLR), Lumentum (LITE) and Infinera (INFN). MAJOR CATALYSTS AHEAD: The optical space's three major catalysts are strong growth in demand from China, an upgrade of the Metro Core market, the transition to 25G/100G architectures, and preparation for the transition to 5G wireless networks, according to Needham analyst Alex Henderson. Strong demand for optical products from China is "causing sold out conditions," and new orders from China should cause the sold out conditions to last well into 2017, according to Henderson. During the current quarter, new orders from China appear set to surge 50% or more versus last quarter, the analyst predicted. Meanwhile, spending on optical products for the Metro Core component of metropolitan networks is starting to increase and should "ramp sharply" into 2017, Henderson forecast. Saying that an upgrade of Metro Core is "long overdue," the analyst predicted that spending on optical products for the component should rise strongly into 2018. Additionally, the upgrade of optical transceivers to 25G/100G architectures should begin this quarter, while service providers are beginning to build the transport capacity for upcoming 5G wireless networks, the analyst stated. Both of these catalysts will also help create "a mega cycle" for the optical components sector, the analyst stated. Henderson raised his price target on NeoPhotonics to $18 from $17, on Oclaro to $7.50 from $7, on Fabrinet (FN) to $48 from $45, on Acacia Communications (ACIA) to $65 from $48, and on Inphi (IPHI) to $44 from $40. The analyst reiterated his $35 price target on Lumentum and identified it as his favorite stock in the sector. PRICE ACTION: In late morning trading, NeoPhotonics jumped 15% to $12.80, Oclaro climbed 5.7% to $5.53, Lumentum gained 7.4% to $29.53, and Infinera advanced about 2% to $12.32.