Nothing is Easy About Alcatel-Lucent (ALU)

As much as I like Alcatel-Lucent (ALU), I thought it would be a good idea to talk a little about the hard road it has ahead of it. There are a few reasons that Alcatel-Lucent is going to have a very hard time in the future, and not all of them have to do with the business. The first concern is obviously cutting costs and increasing revenues. The second is fighting market psychology and entrenched opinions. It is almost as if we live in a world where even facts cannot change opinions.

Detour

First, a tangent. The Constitution of the United States was not this country’s first form of government after independence. The Articles of Confederation were first, but they lacked the centralized authority needed to be a really effective state. So the Constitution was drafted and it had to be ratified in a majority of the states. I forget if it needed to be unanimous or just 2/3rds. Anyway, in New York the debate over the new Constitution raged. In the news a papers a series of essays by Publius were printed. We know these now as the Federalist Papers. They were arguing for the federal style of governance where the central and state government reign supreme in their respective areas, with the Federal government reigning supreme in instances of overlap. The essays were written by Alexander Hamilton and James Madison with John Jay contributing a few pieces. There was no collaborative writing. They all used the same pen name, but each essay was written by one man.

The essays in the paper sparked a massive dialogue in the public. The vote for the Constitution was coming, and the essays were actually swaying people in support of the Constitution. I do not know if you realize how insane that is considering our modern society. In our society if you are a staunch conservative you watch Fox News, and if you are a liberal you watch MSNBC or maybe CNN. You might have situations were one channel is saying one fact, and another channel is saying another fact that is mutually exclusive from the other one. Basically, one or both are lying, but they can’t both be true. Both can be lying though, so keep that in mind when you believe anything you hear.

Alcatel-Lucent’s Boulder

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This will change opinions, but only slowly.

We seek out content that agrees with our positions. While I do not really like that, I can understand it. It is easier and forces us to think less. Our bodies and our psychology is designed to conserve resources. That is why we are so damn lazy. I think your body and mind think you only get so many thoughts before you die so it is saving them for later. This desire for things to remain the way you know them extends to the market. The effect is less powerful in investing than in politics, but it still exists. People hold onto the belief that a piece of crap company is great, because it was great. The past is a powerful driver of sentiment.

What sentiment does Alcatel-Lucent have to counteract? Well it is one of the most firmly established piece of shit stocks in the market. Almost a decade of loss after loss, and not a lot of people are willing to stomach it. To its credit there are still some loyal fans. I am not one of them. I cam in recently, saw what I liked, and decided it was a good turnaround stock. The moment that is no longer true, I will switch my position and hope the company is sold to someone who can do more with the technology.

Alcatel-Lucent needs to do better than its peers. Correction, it needs to do much better than its peers. If Cisco has 20% margins, then Alcatel-Lucent needs 35% margins. If Juniper has 20% revenue growth on a YoY basis, then Alcatel-Lucent needs 40%. Perhaps it will not be that excessive if it can be consistent, but you know people will flock to the negative end of the sentiment spectrum if the company is posting good results, and has one flat quarter. It will be like 4 quarters of positive results, and one quarter it goes flat. Suddenly, the entire market is calling the recover of Alcatel-Lucent a fake-out and a value trap. The company paced on the side of crap that it has worn in a trench. The market is afraid that the company will tumble back into that trench. One sign of weakness and it will lose all its fair weather friends.

Alcatel-Lucent will be pushing a boulder up hill for what will seem like an eternity, like King Sisyphus. It will need many, many years of good news to wash away the crap. I know people like to think, that the market does not hold grudges, but it does. Apple is a good example. The market does shift its opinions, but it holds onto the old opinion, and then switches drastically. There is no gray, but only black or white. What I mean is, that most people thought Apple the crap company it always was. Even when the iPod was great common sense dictated caution on Apple. Just like Alcatel-Lucent right now there are people saying positive things. By the way, do not take the wrong message. I am not saying Alcatel-Lucent is like Apple. I am saying that no matter how hated a stock, there are always people who will say positive things. It was not until the iPhone that the market moved from hate (or ambivalence) to adoration. Since most people in the market go long exclusively, hating a stock enough to not buy it and not caring enough to buy it are the same. Not buying is not buying, your emotions hardly matter. Most people do not short so hate and ambivalence have the same effect.

Prepare for the Long Road

So if Alcatel-Lucent can perform well enough that the era changes, and it becomes a darling, then great. Until that time though, people will be waiting for the slightest weakness to bandwagon on the negative aspects of it. That is a tall order. I do not discuss any of this in my research report, because it is not really hard facts regarding the company.

If you would like to read about Alcatel-Lucent’s fundamentals including in-depth looks at some of its more important products, then pick up a copy of my research report. Check out some other articles on the site, or at the The Market Archive and find yourself a discount code. The report includes what I find interesting about Alcatel-Lucent including some technologies only in the lab stage. it also includes some guidance as to why it seems like a viable turnaround and how long it might take. The risks are also enumerated, and are less theoretical than the one discussed in this article. Thanks.