Dear Mr. Berko:

I’m considering owning Ciena, Polycom, Lucent and Oracle. I would invest $6,000 in each issue for a two- to three-year holding period. Please give me your thoughts on each of these, which were recommended to me by a broker who says that he “wants to earn my business.” What do you think? I can handle the risks, but would really appreciate the comfort of your insight before I open an account with this nice man.

S.K., Des Moines

Dear S.K.:

All brokers are nice men or women if their recommendations increase in price. But when those recommendations fall in value, it seems the broker stops being nice.

Lucent Technologies Inc. (LU-$2.73) was spun off from AT&T Corp. in 1996 and traded at $85 a share in 1999, when its revenues were $38 billion. LU is one of the major designers, developers and manufacturers of telecommunication systems, software and related products. Wireless products account for 44 percent of revenues, voice networking generates 15 percent of revenues, data and network management produces 20 percent of revenues and optical networking and services create 9 percent and 22 percent of revenues, respectively.

Lucent expects to report earnings of 18 cents for 2005 and reckons that earnings will increase to 26 cents in 2006. That means the shares trade at a price-to-earnings ratio of 15, which puts LU’s potential 2006 share price at $4, or a 45 percent increase. I didn’t like LU when it was trading in the $80s (which was typical investor insanity with helping hype from Merrill Lynch, Dean Witter, Goldman Sachs, Smith Barney and others) and I don’t like it today. But 40 percent of the shares are in institutional hands, and Lehman Brothers believes LU could trade between $4 and $5 this year.

Oracle Corp. (ORCL-$12.88) is an enterprise software company that designs and sells software to help clients manage and grow their businesses. Revenues were $12 billion in 2005, and ORCL earned 68 cents a share. This year, revenues are expected to reach $14 billion, and earnings may increase to about 80 cents.

New software licenses account for 35 percent of revenues, and software license updates generate about 45 percent of revenues and product support plus services provide 20 percent of sales. The company has 5 billion shares out (what a ridiculous number), only $160 million in debt and nearly 50 percent of the shares are held by institutions. I don’t like ORCL, I’m not comfortable with Chief Executive Officer Larry Ellison, and I’m uncomfortable with his “torrid growth by acquisition” strategy. In 2003, Ellison bought PeopleSoft, Oblix, Retek, ProfitLogic, i-Flex Solutions and Siebel Systems. That’s a lot of digestion to move smoothly through ORCL’s guts. Though I don’t like ORCL and never did, George Niemond at Value Line thinks ORCL can hit $40 in a few years.

Polycom Inc. (PLCM-$16.58) designs and sells video, voice and data conferencing products and network infrastructures devices to integrate broadband voice and data communications over digital phone lines. PLCM was a Morgan Stanley darling in 1999 and 2000, trading at $70-plus a share and an obscene 200 times earnings. In 2005, PLCM posted revenues of $580 million and earned 75 cents a share. This year, the Street believes revenues can grow to $630 million with share earnings increasing 20 percent to 90 cents. Meanwhile, PLCM has a sound and steady pipeline of new products and expects double-digit revenue growth for the coming three to four years; earnings are projected to increase 50 percent.

PLCM has zero debt, more than $200 million in cash and a book value of $11 a share. There are 95 million shares out, 80 percent of which are in institutional hands. Miller Johnson Steichen and Kinnard (a boutique investment firm) believes PLCM can trade between $35 and $40 within the next two or three years. However, the fools who bought PLCM in the $60s and $70s, when it was being pushed by Wall Street’s major firms, don’t stand a chance of getting even.

Ciena Corp. (CIEN-$3.41) designs, produces and sells intelligent optical systems, and in the past few years it made seven acquisitions: Omnia Communications, Cyras Systems, ONI Systems, WaveSmith Networks, Akara Corp., Catena Networks and Internet Photonics. CIEN hasn’t earned a profit in more than four years, and several analysts on the Street doubt that it will be profitable this year or next. Yet in 2000, this sorry stock traded above $150 a share with earnings of 33 cents (a P/E of more than 450) on strong recommendations from Goldman Sachs, Merrill, Salomon and Morgan Stanley. Frankly, I haven’t the faintest idea what they saw in this company.

Only half of CIEN’s business segments have positive operating margins, and the next few years look bleak. I wouldn’t touch the stock with a beanpole, and Deutsche Securities recently downgraded CIEN to a “hold,” honoring the Street’s agreement to never recommend a “sell.” However, Simon Leopold of Morgan Keegen & Co. gives CIEN a hallowed five-star ranking.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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