JDSU Has Fallen 99%, Here's What To Do Now

One of the worst bear markets in stock market history followed the Internet bubble. Thirteen years after the bubble, the Nasdaq Composite index is still nearly 40% below its 2000 peak. The Nasdaq 100 index initially declined almost 85% and is now about 43% below its highs.

The story is the same for many individual stocks. Some of the companies that survived the bear market are still more than 90% below their highs.

Investors who bought JDS Uniphase (NASDAQ: JDSU) at the peak now have a loss of 99%. The stock has fallen from more than $1,200 a share to about $14 a share, and it could fall even more.

JDSU makes fiber optic equipment and its customers include the world's largest phone companies. It's a big business with JDSU reporting sales totaling $1.7 billion in the past 12 months. But those sales have not led to profits and the company has a loss over the past 12 months.

JDSU has reported losses in two of the past three fiscal years. Analysts expect to see earnings per share (EPS) of $0.61 for fiscal year 2013, ended in June, followed by EPS of $0.85 cents in 2014, and steady growth averaging 10% a year after that.

Even if JDSU meets analysts' expectations, the stock seems to be overvalued. Using the PEG ratio, which compares a company's price-to-earnings (P/E) ratio to its EPS growth rate, JDSU might be worth only $8.50 a share ($0.85 a share times the 10% growth rate).

Seven analysts follow the stock and their price targets range from $7 to $16 with the median being $13.25. At nearly $14 a share, JDSU could quickly fall 4%-5% to the median target.

The weekly chart shows an even larger decline is likely.

JDSU has been range bound since the summer of 2011. The stock faces resistance at $15 and could fall to support near $9 on a decline. After closing higher for seven weeks in a row, JDSU is overextended and likely to struggle at resistance. Given the technical and fundamental picture, JDSU looks like a great short trade. 

Traders could short JDSU at the market. Risk can be limited to the resistance level of $15, about 8% above the current price. A conservative downside target of $11 makes the potential reward 20%, or 2.5 times greater than the risk.

JDSU is expected to announce earnings for its most recent quarter at the end of January. Earnings releases often trigger big moves in stocks and options traders can benefit from these moves at a low cost. Options expiring in February should see large moves if there is a reaction to the earnings news.

Puts with an exercise price of $14 are trading at about $0.90, offering about the same amount of risk in dollar terms as a short trade on the stock. If JDSU reaches $12, a trader could potentially more than double their money in only six weeks with these options at current prices. A move of that size is possible if JDSU disappoints investors, and traders should close the position in early February, after earnings are announced.

JDSU may be a long-term survivor, but that does not make it profitable or a good investment. Further declines in this stock are likely and new all-time highs may not be seen for several generations.

Recommended Trade Setup:
Stock Trade	Options Trade
Sell JDSU short at the market price	Buy JDSU Feb 14 Puts at $1.25 or less
Set stop-loss at $15	Do not use a stop-loss
Set initial price target at $11	Set initial price target at $2
Potential Profit: 20%	Potential Profit: 60%

Please bookmark us