By Philip van Doorn, MarketWatch
Apple has finally rolled out 5G iPhones. This points to a multiyear effort to build actual working 5G networks. You might think the best way to play this trend is to focus on the largest network infrastructure players, but some smaller companies can be very rewarding for investors.
Jamie Cuellar, who co-manages the Buffalo Small Cap Fund /zigman2/quotes/206708770/realtime BUFSX +3.01% , named five companies he expects to benefit from “the increased demand for communications bandwidth,” including 5G, over the next several years.
The 5G rollout has been long touted, but the new technology, which will move data at 100 times the speed of current 4G networks, is only available within some cities. However, Apple Inc.’s /zigman2/quotes/202934861/composite AAPL -0.49% rollout of two 5G-enabled iPhones phones this week, with starting prices unchanged from last year’s iPhones, underlines how quickly demand for the faster networks will grow.
Here are five small-cap companies that Cuellar believes are primed to take advantages of “a good multiyear spending environment” for 5G network construction, sorted alphabetically. Scroll the table at the bottom to see all the data.
|Company||Ticker||Total return - 2020 through Oct. 13||Market cap. ($mil)||Forward Price/ earnings ratio||Estimated change in sales - calendar 2020||Change in sales - calendar 2019|
|Adtran Inc.||/zigman2/quotes/207566273/composite ADTN||12%||$520||42.0||-5%||0%|
|Calix Inc.||/zigman2/quotes/206786772/composite CALX||144%||$1,198||31.6||14%||-4%|
|Ciena Corp.||/zigman2/quotes/208745450/composite CIEN||-2%||$6,432||16.7||-2%||13%|
|Lumentum Holdings Inc.||/zigman2/quotes/204419752/composite LITE||5%||$6,268||14.8||-1%||31%|
You can click on the tickers for more about each company.
All five stocks are held by the Buffalo Small Cap Fund, which is rated four stars (out of five) by Morningstar. Only two of the five are expected to show higher sales for all of 2020, while three achieved double-digit increases last year.
Here’s more about the five, followed by a summary of the opinions offered by Wall Street analysts (also known as the sell side).
During an interview, Cuellar called Adtran Inc. /zigman2/quotes/207566273/composite ADTN +3.73% “the best way to play share gains from Huawei in Europe, if they happen.” Huawei Technologies has been under tremendous pressure from the Trump administration as well as in many other countries over network security concerns and the company’s links to the Chinese government.
Cuellar called Adtran “a 2021 story,” because he expects network spending to “ramp” among the company’s largest customers, including BT Group PLC /zigman2/quotes/209006687/delayed UK:BT.A -1.40% , Deutsche Telekom AG /zigman2/quotes/205973137/delayed DE:DTE +0.01% /zigman2/quotes/207225900/composite DTEGY -0.44% and Orange /zigman2/quotes/203380818/composite ORAN +1.79% .
Calix Inc. /zigman2/quotes/206786772/composite CALX +4.49% can benefit from increased spending among smaller, regional U.S. broadband service providers, Cuellar said. The company has added software services in recent years, and revenue from systems is growing much more quickly than hardware sales. That shift not only means better profit margins but an expected “multiple expansion” for the stock, he said.
Ciena Corp. /zigman2/quotes/208745450/composite CIEN +0.72% operates optical networks, and Cuellar believes the company is another beneficiary of a global move away from Huawei.