Fiber Optics Carried SDL To Huge Returns.(THE SMART INVESTOR)(WINNING WAYS)

Byline: KEN HOOVER

Bandwidth was the buzzword in 1998. There wasn't enough of it for the fast-growing Internet. There was an insatiable demand for faster connections. And investors couldn't get enough of companies that had anything to do with bandwidth.

SDL was right in the middle of this move. It made chips that allowed light waves to flow through fiber-optic cable that was supposed to run high-speed Internet connections.

At the time its stock was about to make its big move in late 1998, earnings the previous four quarters had risen 18%, 375%, 900% and 24%. Sales rose 18%, 21%, 20% and 7%. The five-year growth rate was 28%. The Earnings Per Share Rating was 92. The Relative Price Strength Rating was 94. The Accumulation/Distribution Rating was B.

Mutual funds owned 12% of the float. Management owned 13% of outstanding shares. It had just announced its intention to buy back a million shares.

SDL built its base during a bear market that ran from July to October '98. It was a steep sell-off that took 33% off the Nasdaq. A new bull market that began in October sent the Nasdaq back to its old high by Thanksgiving. With sharp turns like that, many of the new market leaders set up in unusually deep bases.

That was the case with SDL. It set up in a 19-week cup-with-handle base that corrected 73%. It had several features that a careful investor would have noticed. There were two days in the base where it gapped up on heavy volume (1). The decline on the left side was on generally lower volume. At the very bottom, the stock finished the day in the upper part of its range (2).