JDS Uniphase: Building Block For The Bubble.(THE SMART INVESTOR)(WINNING WAYS)

Byline: KEN HOOVER

When Uniphase Corp. of San Jose, Calif., started its big move in late 1998, it had just completed a merger with Canada-based JDS Fitel. The new company was called JDS Uniphase, and it would be the dominant supplier of equipment for fiber-optic communications.

With broadband Internet getting a firm foothold, better and faster cables were needed to move bits and bytes. Within a year, fiber optic would be the buzzword du jour. Investors couldn't get enough of anything relating to it.

In the four quarters before the stock broke out of a consolidation base, earnings first declined by 88%, then rose 675%, 4% and 41%. Sales grew 89%, 69%, 44% and 41%. The five-year growth rate was 45%. The Earnings Per Share Rating was 90. The Relative Strength Rating was 79. The Accumulation/Distribution Rating was B. The 50-day ratio of up to down volume was 1.1.

JDS set up in a 22-week base that corrected 52%. The stock tumbled on the left side of its chart, mirroring the action of a bear market that lasted from July to October.

There was a negative aspect to the base in the form of two days when the stock gapped down on heavy volume (1). On a positive note, the stock found support right at the bottom, finishing at the midrange for the day on big volume (2).

You could draw a line across the bottom of the handle that sloped downward (3). That shows a final shakeout before the breakout. The stock broke out Dec. 3, 1998 (4). But it was an inauspicious breakout on mediocre volume. An investor could be forgiven for dumping the stock over the next few days.