Disclosure and portfolio to come.

Title: Time to position for a new growth sector

Staying ahead of the curve by getting into infrastructure

We were way ahead of the curve and have made big money in components suppliers for the Smartphone/Tablet/App Revolution for the past several years (see The app revolution: the biggest market in the history of the planet and Invest in the app revolution any way you can for example). It’s been a great ride and I actually think we’re still on the runway in terms of longer-term growth.

But what struck me as I listened to earnings calls this last quarter is that telecom service providers are still ramping-up their capital investment. Network traffic continues to grow exponentially, and my analysis and endless search for the best Revolutionary growth prospects has me moving away from the suppliers of the end-unit components and software for the Smartphone/Tablet/App Revolution and into an area that looks like it is ready to explode in growth in coming quarters and for the next couple year — suppliers of the equipment that sits inside the networks that make the whole Internet run as people watch more Netflix, Hulu, Vudu and YouTube, play ever more interactive games, and find ever new reasons to use the Internet.

I am looking at a few names here, including Jupiter (JNPR), which we sold last November for a flat trade, and I’m likely to add it into the portfolio next. But right now the one with the best upside and valuation is Ciena (CIEN). The stock’s been stuck in a range for a couple of years now, but momentum appears to be building with its WaveLogic 3 and GeoMesh solutions.

In January, Comcast (CMCSA) announced a deal with Ciena for its “6500 Packet-Optical Platform equipped with third generation WaveLogiccoherent optical line interfaces—the industry’s first software-programmable coherent technology that scales to 400G and gives service providers like Comcast a cost-effective, scalable way to further enhance their networks.” Comcast is the largest cable provider nationwide–the contract is worth more than chump change.

As if in response to my musings this past weekend, Citigroup analyst Kevin Dennean came out with a note on Ciena yesterday (March 4) saying that “an inflection point is approaching and the “waiting game nears an end.” Specifically, he wrote:

As carriers increase cap ex for network expansion and upgrades, we believe optical names will be 2H13 beneficiaries. 100G deployments and increased adoption of OTN switching (both in standalone 5430 and converged POTS platform) will be key drivers for CIEN…

We believe spending at key North American carriers (Verizon Communications (VZ) & AT&T (T)) will improve for Ciena in CY’13…”

On a valuation basis, Ciena is one of the cheaper stocks on a revenue multiple basis—no doubt due to negative earnings over the past year. But its revenue is expected to climb by nearly 8% this fiscal year (ending October 31), and by 10% in fiscal 2014. Ciena trades for 1.1x revenue (Juniper is trading for 1.7x).

Ciena’s earnings should turn positive this year, especially if it can gain market share as suggested as I’m expecting to see happen as more carriers move to Ciena’s platforms and away from the struggling Alcatel and the ever-doubted Huaweii.

I’m going to buy a first tranche in Ciena today, and I plan on adding more to it after the company reports earnings on this coming Thursday.

Finally, I’m going to clean up the portfolio a bit more as we focus on these companies that serve the telecom industry.  I don’t think there’s as much safety in the tech spending of the enterprises in general, including the big banks. I’m going to shift the focus from a long-held supplier of equipment, software and services of enterprises (rather than mostly carriers), and sell out of our small remaining F5 Networks today.

I still like F5 longer-term and I’ve been singing its praises as far back as in early 2006 and again in 2007 in my old column for the Financial Times when the stock was a small fraction of its current quote (see: Cody Willard: King consumer in full charge of future and Shout it from the laptops: convergence is back!).

But as I’ve written before, actively managing your portfolio means knowing when to move your money to more fertile ground. So, to recap, today we’re selling F5 Networks and adding Ciena to the Revolution Investing portfolio.