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Has Market Internalized Downturn?

Shares of Sycamore Networks could have gone either way Wednesday, the first full day of trading after the optical networking equipment maker delivered both good and bad news with its Q2 report.

However, investors chose to focus on the positive - the company's return to profitability and revenues that easily exceeded forecasts - sending shares up 15.4% by the final trading bell.

SCMR's surge came despite a company warning to investors that sales for the next two quarters likely will be lower than previously expected.

In recent weeks, such news has sent other Internet stocks into a tailspin. The most prominent example is Cisco Systems , whose shares fell 13% on Feb. 7, a day after the networking giant missed Q2 estimates and cautioned that the going will be rough through the end of its fiscal year.

But we may be at the point where the market already has factored the slowing economy into some 'Net stock prices. Even with Wednesday's gain to $26.31, Sycamore has plunged 49% since closing at $51.38 on Jan. 23. Last Friday, after being dragged down by Cisco's results and gloomy short-term forecast, SCMR hit its lowest closing price ($22.44) since going public in October 1999.

That entry point, coupled with better-than-expected Q2 revenues and net income of 6 cents per share (which followed an unexpected loss in Q1), emboldened investors to ignore Sycamore CEO Dan Smith's philosophic advisory that large telcos and service providers - the company's target customers - are in a "period of reflection" regarding their spending in coming quarters.

Perhaps Sycamore merely benefited Wednesday from its status as one of the favored companies in an Internet sector still preferred by investors over most others. Whatever the current state of the economy, the market has a great fundamental belief in the long-term future of the infrastructure sector, especially optical networking technology, which offers the promise of dramatically increased bandwidth.

It will be interesting to see how the market treats the few Internet companies yet to report in this earnings season. Like SCMR, most 'Net tickers are at or near their lowest prices and are reducing expectations for the near-term. But most Internet companies aren't red-hot infrastructure players, and most aren't profitable.

These periods of reflection can be maddening.



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