Telecom Overview: A Pound of Patience

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1 In This Issue Page 1 Page 4 Telecom Overview: A Pound of Patience The Telecom Connection Portfolio Telecom Overview: A Pound of Patience I don t believe the telecom run is over despite how badly financial markets around the world have been trashed during the past two weeks. In fact, the risk in most telecom stocks has been sharply reduced during this selloff, and the potential rewards for investors are once again very attractive. Two weeks ago today, the world s financial markets underwent a major shift. Small-cap stocks, especially in telecom, had been by far the strongest performers this year. As the year began, it seemed that the riskiest assets suddenly became the most sought after as still-struggling outfits like MRV Communications (MRVC:Nasdaq) and Finisar (FNSR:Nasdaq) spiked and ran up triple-digit gains as we closed out the first quarter. (The two are still up nearly 60% and more than 100%, respectively.) Two Highfliers Lose Altitude (Continued on the next page) PLEASE SEE IMPORTANT LEGAL DISCLAIMER ON LAST PAGE 1

2 However, it wasn t just speculative telecom small-caps. The Russell 2000 index of small-cap stocks screamed higher to start off the year, rising 16.5% from the end of December to its May 5 high. As recently as 10 trading days ago, the index was up more than 12% on the year, but now its gains have been cut to only about 6% for the year. As the chart below of the ishares Dow Jones US Technology (IYW:NYSE) shows, tech stocks ran higher to open the year, but have been in free fall the past two weeks. ishares Dow Jones US Technology (IYW:NYSE) But let s be clear that it wasn t just small-caps and telecom that led the spike higher to start off this year. The oil services index (OSX) was also up huge, hitting a high of 238, or up some 31% on the year. When? Two weeks ago, May just before the index collapsed. Remarkably, despite a 15% decline in the past 10 trading days, it s still up some 12% year to date. Philadelphia Oil Service Index (OSX) (Continued on the next page) 2

3 Let s also look at some big-cap tech, such as the Philly Semiconductor Index (SOX), which is dominated by mega-cap semiconductor stocks such as Intel (INTC:Nasdaq) and Texas Instruments (TXN:NYSE). Its highest gains on the year? About 15%. As recently as two weeks ago, it was still up some 10% for the year. Now? It s down 3% year to date. Philadelphia Semiconductor Index (SOX) During the past four years, I ve been an aggressive buyer of weakness and a gentle seller of strength, as my analysis has continually pointed toward a continued healthy and growing teleconomy. I want to be fully invested when steady economic and earnings growth are visible. As the disparate stock and index charts above reveal, it s not just tech and telecom that are being roiled right now by the financial markets. From oil services to pieces of the Russell 2000 s very diversified small-cap index, and even to U.S. Treasuries and commodities like copper, the dislocations are ugly and spreading. Nevertheless, as strong as the consumer, the enterprise and especially the carriers in U.S. and Europe are, I expect we ll look back in a year or two and realize that the ongoing selloff was a great opportunity to invest in the fastest-growing telecom companies like Tellabs (TLAB:Nasdaq) and JDSU (JDSU:Nasdaq). I ve trimmed a good bit from each of those two positions and others throughout the ramp up, and I am looking to start building back those stocks and others that I ll highlight for readers in the coming weeks. But with a high potential for more dislocations and investors risk-aversion in the near term I believe that patience remains key. So for now, I will sit tight. Although this selloff could still have a ways to go, as we continue to move downward the risk/reward in many telecom stocks seems to favor the long side. 3

4 Company Name Apple Computer AAPL ADC Telecommunications ADCT AudioCodes AUDC Ciena CIEN Cisco Systems CSCO Citrix CTXS ebay EBAY F5 Networks FFIV Corning GLW Google GOOG JDS Uniphase JDSU Juniper Networks JNPR Motorola MOT MRV Communications MRVC Microsoft MSFT Palm PALM Research In Motion RIMM SanDisk SNDK Sun Microsystems SUNW Tellabs TLAB Verizon VZ Date Initiated Cost Basis per Share Number of Shares Amount Invested Current Price % Gain/Loss IXTC at Buy Date IXTC Return 02/09/2006 $ $ 27, $ % $ % 12/10/2003 $ $ 12, $ % $ % 11/12/2003 $ $ 18, $ % $ % 05/04/2006 $ $ 12, $ % $ % 02/07/2005 $ $ 10, $ % $ % 04/27/2006 $ $ 16, $ % $ % 11/25/2005 $ $ 34, $ % $ % 10/13/2004 $ $ 35, $ % $ % 02/15/2006 $ $ 24, $ % $ % 02/09/2006 $ $ 71, $ % $ % 09/26/2002 $ $ 6, $ % $ % 02/23/2004 $ $ 17, $ % $ % 06/17/2004 $ $ 32, $ % $ % 08/20/2003 $ $ 16, $ % $ % 09/26/2002 $ $ 64, $ % $ % 03/02/2006 $ $ 31, $ % $ % 03/02/2006 $ (200) $ 15, $ % $ % 04/06/2005 $ $ 4, $ % $ % 10/02/2003 $ $ 6, $ % $ % 09/08/2004 $ $ 18, $ % $ % 10/19/2005 $ $ 7, $ % $ % (Model Portfolio performance continues on the next page) 4

5 The Telecom Connection Portfolio Performance Total Average Return -0.95% 2006 YTD Return 7.85% Performance results listed here reflect values of stocks as of the close of the most recently completed trading day, and do NOT take into account dividends paid, interest earned or commissions. Results are updated overnight and posted prior to the market open the following business day. Sales are taken from the most recent purchase of that stock unless otherwise stated. The 2006 YTD Return figures reflect changes since the beginning of The Total Average Return figures reflect changes since inception on 9/26/2001. Nasdaq Telecom Index Performance Portfolio Inception Open Level Current Level % Gain/Loss Since Portfolio Inception 2006 YTD Return Nasdaq Telecom Index (IXTC) 8/14/ % 10.18% At the time of publication, the buy-side firm in which Mr. Willard is a partner was net long: AAPL, GLW, GOOG, JDSU, JNPR, MOT, MSFT, SUNW, TLAB. Net short RIMM. To see the full Telecom Connection model portfolio, including closed positions, visit 5

6 Contact Info Customer Service: Please or call TSCM (8726) Mon. Fri. 8 a.m. to 6 p.m. ET; or outside the U.S. and in Canada, call Reader Feedback and Questions: Please send an directly to Cody. Again, please direct all account-related inquiries to customer service. Legal Information This information is confidential and is intended only for the authorized Subscriber. Please notify us if you have received this document in error by telephoning TSCM (8726). Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. TheStreet.com is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. Mr. Willard is restricted from transacting for his own benefit in securities discussed in The Telecom Connection. The firm in which Mr. Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in The Telecom Connection. In such cases, appropriate disclosure is made, although positions may change at any time and without notice. In addition, certain of TheStreet.com's affiliates and employees may, from time to time, have long and short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in The Telecom Connection and may take positions inconsistent with the views expressed. At the time of publication, the buy-side firm in which Mr. Willard is a partner was net long: AAPL, GLW, GOOG, JDSU, JNPR, MOT, MSFT, SUNW, TLAB. Net short RIMM. The Telecom Connection contains Mr. Willard's own opinions, and none of the information contained therein constitutes a recommendation by Mr. Willard or TheStreet.com that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Mr. Willard's past results are not necessarily indicative of future performance. 6