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II-VI leads parade of soaring local tech companies; but will what goes up come down?

Friday, March 03, 2000

By Len Boselovic, Post-Gazette Staff Writer

Wall Street's fickle finger of fate pointed directly at II-VI Inc. shares yesterday. Fortunately, it gave the Saxonburg laser concern a big thumbs up. Shares of II-VI nearly doubled yesterday, closing at 60, up 25. More than 2.1 million shares changed hands, about 28 times the average daily volume of 76,500.

  Ted Crow - Post-Gazette

The climb lifted II-VI's market capitalization -- the value of all its outstanding stock -- to $381 million.

What made the company worth $159 million more than it was when investors went to sleep Wednesday night?

The only discernible news was a strong buy recommendation from an analyst at a West Coast firm that was co-underwriter of II-VI's secondary stock offering in 1995. Roth Capital Partners analyst Dave Kang set a $76 target on II-VI shares, citing new products that will take the company into the hot telecommunications business. Until now, II-VI's lasers and related products had been used predominantly in industrial applications.

II-VI's meteoric rise -- it was trading for $11.75 Oct. 1 -- reflects a growing volatility in the stock market, particularly in technology shares. If a company's in a hot market, eager investors are placing much more value on its earnings potential or early acceptance of its new products than they did in the past.

"That's absolutely true," says Tim Slevin, who follows technology stocks for the Downtown brokerage Parker/Hunter. "There's a great deal more volatility because there's an easier shift in momentum in today's day and age than there used to be."

The momentum is even greater for thinly traded shares such as II-VI. Other local tech stocks that have made big moves since Oct. 1 include Tollgrade Communications, which closed yesterday at 102 vs. an Oct. 1 close of 26 7/8; Mastech Corp., which closed yesterday at 36 5/16 vs. an Oct. 1 close of 13 7/16; and Corp. C-COR shares were trading at 28 1/4 Oct. 1 and closed yesterday at 44 31/32. Adjusting for a 2-for-1 split Jan. 7, shares of the State College company have increased 218 percent the past five months.

II-VI, Tollgrade and C-COR are players in the telecommunications arena, while Mastech's offerings include electronic commerce services.

Both markets are driven by surging demand for products that enable more voice, video and data to move over fiber optic networks. One of II-VI's new products is used in a product that increases the capacity of fiber optic lines.

When it comes to technology stocks, "there are solid underpinnings for a lot of the enthusiasm," says Slevin.

For a lot, not all, of the enthusiasm, he quickly added.

Yesterday's bout of II-VI fever left former shareholder Charlie Smith feeling like a stranger in a strange land.

Smith, chief investment officer for Fort Pitt Capital, sold half of the Green Tree money management firm's stake in II-VI last week when the stock hit 34. He sold the other half yesterday. New products or not, he thinks the stock's gotten a little ahead of what he considers its fair value to be, somewhere in the mid-30s.

"The speculation that these products are going to be big sellers is exactly that," he says. "It's like we're in a different realm. I don't know how long it lasts, but it doesn't make any sense."

II-VI Chairman Carl J. Johnson told money managers last week the company is on track to achieve its goal of 20 percent annual growth. Johnson spoke at an investment conference sponsored by Roth Capital Partners. Analysts expect the company to earn $1.07 per share in the current fiscal year, which ends June 30, vs. 84 cents per share a year ago.

Based on yesterday's closing price, II-VI is selling at 56 times estimated earnings, which is a little rich for Smith. He thinks there are many stocks selling for more reasonable earnings multiples, citing Alcoa as one.

Shares of the world's biggest aluminum producer peaked at 871/4 on Jan. 10.

Alcoa fell 215/16 yesterday to close at 6613/16 on news European Union regulators may have misgivings about the proposed merger between Alcan Aluminum, Pechiney and Alusuisse Lonza. The same regulators must approve Alcoa's proposed acquisition of Reynolds Metals.

Based on yesterday's closing price, Alcoa is selling for 15 times estimated 2000 earnings.

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