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Ask The Trader
Wednesday, March 21, 2001

Lu-Lu Over Lucent

What is you opinion on Lucent? I think it has hit a bottom (possibly a double-bottom) and is ready to soar. Do you concur?

Lucent has been a chartist's and a fundamentalist's worst nightmare over the past 14 months. Talk about a downtrend! Of course, the downtrend on the chart was warranted given the fact that the company was loosing business to competitors in just about every one of its product lines. Loose credit terms and delays in the roll out of key products also served to alienate investors during Lucent's yearlong sell off.

As traders, we should not get in the habit of trying to make lemonade out of lemons. Until Lucent can prove that it can turn things around, there is no reason to buy a stock that is still entrenched in a downtrend.

Some may argue that Lucent has all of the bad news priced into it already and that it can't go much lower. This may be true (or may not be), but assuming it is true, you have to ask yourself another important question; that being "What is the catalyst that will make LU go higher?" There is obviously an opportunity cost to holding stocks that move sideways and this has to be weighed against other prospects that could reap greater rewards.

It is probably best to wait and see how the stock reacts to good news over the next few weeks and months before turning your capital into potential dead money in Lucent. If the stock rises and holds on the good news, it means that investors are willing to stick it out over the long run. This results in a strong base pattern from which Lucent can start to edge higher.

This news theory will be tested this week, as two big contracts were just announced. One contract was with Verizon Wireless for $5 billion and the other is with Deutsche Telekom for an undisclosed amount.

Lucent has experienced about nine legs lower over the past year. The best thing for the stock right now is for it to stabilize and move sideways. This will shake out the impatient traders, while attracting value investors that tend hold on through tough times. Until Lucent attracts buyers with strong conviction in the company's prospects, the other shoe will continue to drop.

Good Luck and Have a Profitable Trading Day

Craig Seidler
Assistant Editor

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