So You Want To Bet On Broadband?

These stocks aren't cheap, and they can be volatile

Web surfers fed up with pokey dial-up connections aren't the only fans of broadband, or high-speed Internet access. "The demand for broadband is one of the fastest-growing areas in telecommunications," says Oscar Castro, manager of the Montgomery Global Communications fund. "That means plenty of opportunities for investors." Adds Brian Stansky, who runs the T. Rowe Price Media & Telecommunications fund: "If you look at where the world is really going to change, this is it." Indeed, America Online's recently announced merger with cable and media giant Time Warner is a sign that "broadband is becoming a more valuable financial asset," says Bruce Kasrel of Forrester Research.

Today, an estimated 2 million U.S. households rely on broadband to reach the Internet. By the end of 2003, however, Forrester figures that 26 million homes will use broadband. But many broadband stocks are far from cheap, and they can be volatile. For instance, shares of JDS Uniphase, whose laser devices expand fiber-optic networks and are key for broadband, slumped as much as 20% during the tech stock sell-off in the first week of January. But they are still up 1,005% over the past 12 months.

GROWING DATA WAVE. Which businesses are most likely to benefit as Internet speed revs up? Kevin Landis, a manager at Firsthand Funds, is betting on high-tech outfits that are `'building the broadband backbone." One of his top picks is Ciena, whose equipment helps expand the capacity of fiber-optic networks so they can more swiftly carry the growing wave of Internet data. Landis is also high on PMC-Sierra and Applied Micro Circuits, whose semiconductors help power high-speed computing networks. Landis notes that the prices of all three stocks have rocketed during the two years since he purchased them. "But the arguments for owning them are just as valid today as back then," he adds, referring to the Internet's thirst for more speed.

Another terrific broadband play is cable TV, particularly companies such as Cox Communications and Comcast, says T. Rowe Price's Stansky. This year, Stansky says, cable companies will start more widely offering broadband via the TV set-top boxes. "You'll be able to watch a movie on HBO, while your teenage daughter talks to her friends on an Internet phone connection and your son surfs the Web," he explains. Stansky also favors PSINet, which is helping build broadband networks in foreign markets.

Companies that offer consumers broadband services are also likely to win big as high-speed Internet connections replace dial-up modems. In this category, Montgomery's Castro favors Excite@Home, the leading provider of cable broadband, with about 1 million subscribers. Excite@Home shares, recently trading around 39, are off 26% over the past year because many investors are worried that the company's business will falter when its exclusive contract with AT&T's cable unit ends in 2002. But Castro believes Excite@Home's array of broadband services will continue to draw new subscribers. He sees Excite@Home shares climbing to 65 within the next 12 months.

Investing in any one broadband business is a gamble because no one knows yet which broadband technology will dominate. So spread your bets, monitor your picks, and brace for speed bumps along the way.

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