Nikos Theodosopoulos

Managing director,

UBS Warburg

CATEGORY: Networking equipment

STOCK PICKS: Nortel Networks (NT), Tellabs (TLAB), JDS Uniphase (JDSU)

Here's an irony for you: Telecom equipment analyst Martin Pyykkonen of CIBC Oppenheimer (see page 128) is recommending networking stocks, while networking analyst Nikos Theodosopoulos picks telecom companies. But it's a fair reflection of where the communications market is headed these days. Cisco Systems and Nortel Networks are invading each other's turf, and everybody is hawking so-called Next Generation gear that uses Net technology to transport data, voice, and even video traffic.

Theodosopoulos believes in Nortel precisely because it's doing a good job of spanning those two worlds. Once mostly a maker of giant phone switches, Nortel acquired Cisco rival Bay Networks in 1997. Bay has helped Nortel grab an even bigger share of the white-hot market for optical Internet gear, where it holds the No. 1 position and from which it derives about 30% of its $24 billion annual revenues. Nortel also is gaining ground in wireless equipment. Theodosopoulos sees revenue growth accelerating this year, to 32%, from 26% last year, while more efficient sales and manufacturing should boost operating margins a point, to 11.5%. He figures the stock, now at $60, will climb to $75 by yearend.

Nikos Theodosopoulos

A more controversial pick is telecom equipment maker Tellabs Inc. Theodosopoulos thinks its upcoming optical product will be a clear winner. Due in the second half, the box will manage traffic hand-offs between the giant fiber-optic rings that make up the backbone of the phone system--where Tellabs is already No. 1. That should help drive its stock, now $66, to $80 by yearend.

Rounding out his top picks, Theodosopoulos recommends JDS Uniphase Corp., a 1999 stock-market darling that still has upside potential. The No. 1 maker of components used in optical products, JDS saw its shares soar more than sixfold in the past 12 months. The future looks bright because that multibillion-dollar sector is on track to grow an additional 75% to 100% this year. JDS has the broadest product line and strongest management team in the business, Theodosopoulos figures, so its shares could rise an additional 18% by yearend, to $130.

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