Billionaire Ken Griffin’s Citadel Has Taken a 5.1% Stake in This Tech Stock

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A 13G filed with the SEC has revealed that Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, owns 5.2 million shares of Ciena (NASDAQ: CIEN), a $1.7 billion market cap communications equipment and software company. This comes out to 5.1% of the total shares outstanding. We track quarterly 13F filings from hedge funds such as Citadel as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an excess return of 18 percentage points per year, and so we can see that the fund had only about 1 million shares in its portfolio at the end of December 2012. So the overwhelming majority of Citadel’s position has been purchased in the last two and a half months.

The largest holder of Ciena shares in our database is Platinum Asset Management. Platinum, which is managed by billionaire Kerr Neilson, cut its stake by 7% during the fourth quarter of 2012 but still owned 6.7 million shares of the stock. Billionaire George Soros reported a large position in Ciena’s debt, while Mariko Gordon’s Daruma Asset Management disclosed ownership of 2.2 million shares (though this was down considerably from the end of September).

The first quarter of Ciena’s fiscal year ended in January, with the company experiencing an increase in revenues in both products and services (9% growth overall) versus a year earlier. While GAAP numbers showed both operating and net losses, much of this was due to a loss on debt extinguishment and share-based compensation. In non-GAAP terms the company’s earnings per share were 12 cents, well up from the same period in the previous fiscal year and easily beating analyst expectations. The stock rose 17% on the news.

Results from the 10-Q was particularly good news as Ciena Corporation had been struggling with profitability in recent quarters and had previously guided numbers down for the current year. Current analyst expectations for the fiscal year ending in October 2014 imply a forward P/E of 19. This suggests that Ciena will have to continue beating expectations or be in a strong growth position at that time. We think it’s notable that the most recent data- from the end of February, before quarterly results were released- show 31% of the outstanding shares held short. Short covering may have helped fuel the rally in the stock price. We would also pay attention to the fairly high beta of 2.3.

Ciena’s peers include Alcatel Lucent SA (NYSE: ALU), Cisco Systems, Inc. (NASDAQ: CSCO), Ericsson (NASDAQ: ERIC), and JDS Uniphase Corp (NASDAQ: JDSU). Alcatel-Lucent and JDS have also not been very impressive in terms of their bottom line, and also carry betas above 2. Revenue numbers have not been particularly good at these two companies. Judging by the P/E multiples implied by forward earnings estimates the sell-side is more optimistic on JDS Uniphase- specifically, its forward P/E is 16 while consensus is for very little net income at all in 2014 for Alcatel-Lucent- but we’d still avoid both stocks until they turned in better numbers on the financial front. Ericsson is also expensive in terms of its trailing earnings, but analyst consensus is that the company will improve strongly and as a result it trades at only 14 times consensus earnings for 2014. Still, its numbers at least on the top line have not been particularly encouraging. If there is a conventional value stock in the lot it’s Cisco, since it posts a trailing earnings multiple of only 12 and whose business seems quite healthy judging by results in the fourth quarter of 2012. Since we’d consider stocks in that valuation range to be fairly valued at a considerably weaker performance level, we think that it’s at least a good place for investors to start.

Last quarter was quite a good one for Ciena, but even if we annualize the adjusted earnings per share we do not get a particularly cheap stock. We would at least need to see the company sustain its recent results for another quarter or two and show that last quarter was not an anomaly.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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