This earnings season has been a troubled period for most great companies.  We finally started to see real earnings beats and finally started getting guidance raised out of many of the big technology stocks.  Yet the new market bias and very stretched valuations played havoc with most of the companies, and investors sold off most of the companies regardless of the news.  But the big selling came on strong in many of the cult stocks with low share prices, large floats, large shareholder bases, and very active trading.

We wanted to take a look at Level 3 Communications, Inc. (NASDAQ: LVLT), RF Micro Devices Inc. (NASDAQ: RFMD), Alcatel-Lucent (NYSE: ALU), Flextronics International Ltd. (NASDAQ: FLEX), Sprint Nextel Corp. (NYSE: S), Netlist, Inc. (NASDAQ: NLST), and Conolog Corp. (NASDAQ: CNLG).  Some of these seven cult stocks are big companies with a broad customer or broad investor base, while some are mere cult stocks that have seen the sort of trading activity that raises the eyebrow of the skeptics.

Level 3 Communications, Inc.

Level 3 Communications, Inc. (NASDAQ: LVLT) reported a $182 million net loss, with earnings at -$0.11 EPS, as revenue fell 12$ to roughly $924 million. The wild card for the quarters ahead is the launch of Level 3 Tower Access, a ploy to gain off the overly stretched wireless networks due to all the smartphone data usage.

The company claimed improvement in its customer buying behavior and also saw positive free cash flow.  It is adding more sales staff but the company keeps rolling its debt.  Ultimately this debt level has to come down even if the company is getting better debt terms.

Level 3 shares fell from $1.38 to $1.27 with earnings this week and it effectively doubled its daily volume to over 20 million shares before Thursday’s recovery to $1.30.  The 52-week trading range is $0.60 to $1.77 and shares were as high as $1.66 on January 5… shares are 21% off the highs a month ago.

RF Micro Devices Inc.

RF Micro Devices Inc. (NASDAQ: RFMD) actually beat earnings on January 27 but was short against revenue estimates… Revenue was down 2% sequentially but up 24% year over year at $250.3 million; Net income was $24.9 million.

The company said sales from cellular products group will be better than normal seasonality, with multi-market product sales flat to up sequentially.  The opportunity for the company is the growth of smart phones, netbooks, data cards and internet connectivity devices.  Merriman Curhan Ford started this with a Buy rating after earnings with an upside seen to the $7 to $8 range.  This has been one of the duds of Cramer’s Mobile Internet Tech Tsunami stock picks.

With shares at $4.05, its 52-week trading range is $0.73 to $5.85 and the high in 2010 was $4.98 on January 4.  This only lost about 2.5% after earnings and has actually held its own since the earnings report but shares are down almost 20% from the highs in January.

Alcatel-Lucent

Alcatel-Lucent (NYSE: ALU) proved that what Cisco Systems (NASDAQ: CSCO) was seeing was not universal.  The troubled telecom and communications equipment and service provider gave earnings that showed now real return to normalcy yet and there was very little good news in the earnings report.  The profit was 46 million euros, or $63 million U.S., versus a 3.9 billion Euro loss a year ago, partly on one-time gains.  It saw a 19.9% drop in revenue to 3.97 billion euros to the lower-end of its own estimates and below revenue estimates of 4.3 to 4.4 billion euros.  Operating margins for this year are now seen at 1% to 5% versus 5% previously targeted.  If you go through the notes, this summary is actually being kind as problems exist on many fronts here.

Alcatel-Lucent closed down over 12% on Thursday at $2.79 in its ADRs.  The 52-week trading range is $1.09 to $4.95, and this hit a January high of $3.82 on January 14 for its ADRs.  This puts the stock down about 27% from highs of just a month ago.

Flextronics International Ltd.

Flextronics International Ltd. (NASDAQ: FLEX) was actually one  of the real laggards of the electronics manufacturing services companies this earnings season because it did not have an absolute blowout of the estimates as most peers did.  It was effectively the worst EMS reaction when you consider the double-digit gains from peers.  The earnings Were $0.17 EPS and $6.6 billion in revenues versus Thomson Reuters estimates of $0.15 EPS and $6.3 billion; guidance was the issue at $0.13 to $0.16 EPS on $5.8 to $6.2 billion in revenues versus Thomson Reuters estimates at the time of $0.13 EPS and $5.8 billion.  Flextronics was a victim of ‘sometimes good just isn’t good enough.’

At $6.87 now, the 2010 high was $7.49 on January 4.  The 52-week trading range is $1.81 to $7.97.  A Needham upgrade to BUY kept this reaction from being worse.  Being off only 8% from January highs in this market might not sound bad, but the EMS stocks have mostly seen significant gains during earnings season.

Sprint Nextel Corp.

Sprint Nextel Corp. (NYSE: S) looked more like it should be called “Sprint, Next Sell!” when we saw its earnings reaction this week.  The company has closed on its Virgin Mobile and its iPCS deals and has been building out the Clearwire pact for the 3G and 4G wireless networks.

Sprint reported a loss, lower revenues, and lower subscribers this week.  The hurdles are many.  It is still amalgamated of many brands, has too many networks, and frankly is viewed as having the least attractive smartphone lineup of the 3 US major wireless carriers.  Everyone keeps hoping that Sprint Nextel will be acquired, but that is a rumor and a story that has become as frequent and as credible as the ghost ships and sea monsters of yesteryear.

Shares fell from $3.65 to $3.36 on Wednesday (on over 250 million shares to boot) and then to $3.26 on Thursday.  The high for 2010 has so far been $4.23 on January 26.  So the 10.6% drop from pre-earnings this week paled in comparison to the sell-off of 23% from the January highs.

Netlist, Inc.

Netlist, Inc. (NASDAQ: NLST) has not even reported earnings yet but it has set a date of Thursday, February 18… If there was ever a true tech cult stock in late 2009 into 2010, Netlist is that.  Because of its cloud computing initiatives and because of day trader hype and the never-ending quest of the investment community’s willingness to chase low-priced stocks, this one ran and ran.

One of the issues it has run into is that it is in patent suits as the plaintiff, but more important is that it filed to sell $30 million in stock.  After an exponential run-up from November the market cap here is only $67.5 million now.  The average volume is now over 4 million shares, and it has become frequent to see one-fourth or one-third of its entire share base trade in a single trading day…. a true cult stock.

In November it was hardly a $1.00 stock.  By the end of November the stock was north of $7.00.  The 2010 intraday high was $6.10, although it highest close for 2010 so far has been $5.53.  A close of $3.40 on Thursday puts this stock down 44% from intraday highs of 2010 and down 38% from its highest 2010 closing price.

Conolog Corp.

Conolog Corp. (NASDAQ: CNLG) is about as much of a cult stock as you will ever see.  It spent most of 2009 in the $1 range, at least after a 1-for-5 reverse share split. Forget earnings season here because this is just a classic example of a trader’s tout around news.  The two big issues around this stock that has caught the mind of the penny-stock traders have been that it announced the start of production of its “GlowWorm” fiber optic detector in late-January and the news that it announced advance orders for 280 systems and other equipment valued at over $1.9 million on Feb. 1.

Anything is possible in the world of penny stocks and cult stocks.  But Conolog is a company that has a history as questionable as it gets.  ‘GlowWorm’ is the big attraction for traders here, but this almost sounds more like a product for crazy fishermen or for parasite removal in a colonic than it does a ‘fiber optic detector that may be used in any fiber optic line or network without the need to cut the cable.’ When you see 3 reverse stock splits in four years, what does that tell you?

Conolog closed at $1.41 on January 4 and hit an intraday high of $4.72 on February 1.  The high close was also $4.01 on February 1, a day which saw a whopping 21+ million shares trade hands… that is almost 7-times its whole float of almost 3.2 million shares.  Shares are now back to $2.23 and the market cap here is a mere $7.1 million.

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JON C. OGG
FEBRUARY 12, 2010

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