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SIVY ON STOCKS from CNNmoney.com
October 19, 2001 ******************[ A D V E R T I S E M E N T ]**************** QUICK! If you won $25,000 CASH what would be on your "Best Of" list? Keep thinking because here's a chance to try to win the $25,000 Grand Prize. BONUS: See what else has been selected "Best Of" at money.com and try an issue of MONEY Magazine FREE! Click Here: http://www.money.com/bestof **************************************************************** Shattered glass Reflections from the Corning debacle. By Michael Sivy NEW YORK (CNNmoney) - I receive e-mails from time to time taking me to task because stocks that I like have gone down. Not surprisingly, these e-mails have become more frequent in the past six months as the bear market has worsened. But not all stock market disappointments can be fully explained by the recession. Some stock disasters are genuinely shocking and seem to violate all the principles that usually keep investors out of serious trouble. Such cases are worth special consideration and analysis. There is no stock that has surprised me more over the past year than Corning, the world's leading maker of fiber optic cable. Had you told me a year ago that Corning (GLW: down $0.12 to $7.90, Research, Estimates) was going to drop from more than $100 a share to less than $8 today, I would have said that was practically impossible. And yet it happened. The fundamental case for Corning seems unassailable. The former maker of high-performance glass discovered that the company's expertise could be much more profitably employed in high-tech than in making ovenproof cookware. The burgeoning telecom market had a seemingly endless appetite for fiber optic cable. And Corning quickly became the world's biggest producer with 40 percent of the market. Moreover, the company not only was the big-volume producer but was also the leader in the most-profitable cutting-edge fiber optics. Then came the problems Only trouble was that telecom companies became so overconfident in the late 1990s that they laid far more cable than they actually needed. In fact, there will be excess capacity for at least another 12 months. Needless to say, few customers are going to order a lot of cable from Corning in the interim. So sales volume in some product lines is down more than 50 percent. In its third-quarter report, released after the market closed on Thursday, Corning announced a 74 percent drop in operating earnings to 9 cents a share. And that was the good news. Aftertax restructuring costs for the quarter were $222 million. More restructuring charges are still to come. The fourth quarter will likely result in an operating loss of at least 20 cents a share. And Corning's chief fiber optic cable plants will be idled for at least two months. At this point, there are three questions that need to be answered. Where does Corning go from here? Is there any point at which it would be a contrarian buy? And finally, is there anything to be learned from the situation? If I owned individual tech stocks rather than indexes, I would have owned Corning, I would have held it throughout the decline -- and I certainly wouldn't sell it here. The company remains the dominant player in fiber optic cable. And for all the cable that has been laid, there is still 10 times as much left to do. Moreover, when the wiring starts again, Corning will profit from being the technological leader with the best high-margin products. On the negative side, Corning is spending somewhere in the neighborhood of $1 billion on restructuring. Less than half of that is in cash and Corning has more than $1.5 billion on hand, so serious financial problems are unlikely. But they are possible if business deteriorates far more than anyone expects. At this point, I would treat Corning stock like an option. The upside is enormous -- three or four times the current price in a couple of years. But the risk is much greater than usual for a stock of Corning's quality. The most basic truth to be learned from the Corning story is that your reasoning can be impeccable and you can still lose your shirt on a stock. Corning seemed to have everything going for it -- leadership and technological dominance in a market with a very high core growth rate and an exemplary balance sheet. Corning is the poster child for diversification. The goal is not so much guarding against obvious risks, but rather guarding against risks that can't happen -- but do. Two final thoughts. Corning traded as high as 91 P/E last year, and market historians will tell you that as a rule no company sustains a P/E of more than 50 for any length of time. There's just not enough good news in the world for that. Finally, one-product companies -- no matter how brilliant that product may be -- always carry special risks. In the short run at least, the market for Corning's fiber has turned out to be an optical illusion. ### Read all of Michael's columns at: http://money.cnn.com/markets/sivy/ To subscribe or unsubscribe to Sivy on Stocks, go to: http://money.cnn.com/email/ -------------------------------------------------- SPECIAL OFFER - MONEY MAGAZINE PERSONAL FINANCE COACHING SYSTEM Tap the expertise of MONEY for your specific personal finance needs with the help of a one-to-one coach... To learn more and speak to a coaching consultant, call 1-800-748-4056 x5705, or visit our website at: http://money.cnn.com/services/coach/index.html ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. 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