3 Stocks to Watch: CIEN, PSS, HOV

Shares of Ciena (CIEN) plunged Thursday on the communications-equipment maker's diminished profits for its fiscal third quarter and lowered sales outlook for the current quarter.

The Linthicum, Md.-based company, which manufactures network capacity equipment used by big customers like AT&T (T), managed to beat Wall Street's estimates for the quarter, but earnings were down from a year ago.

Slumping sales prompted Chief Executive Gary Smith to offer a bit more detail in a Thursday conference call. Weaker earnings prospects for telecommunications companies are prompting a broad reduction in the sort of business-to-business capital expenditures that define the fortune of Ciena and other equipment suppliers.

"Based on our recent interactions with customer, it is clear that many are more carefully scrutinizing expenditures given the broader economic uncertainty," the CEO said. "In the last week of the third quarter we began to experience order delays from many of our tier one service provider customers. As a result we revised our near-term outlook."

Hamed Khorsand, at BWS Financial, wrote Thursday the broad trend could affect the sector for some time.

"The lengthening of the sales cycle and slowing in deployment could be troubling to wider base of customers than only affecting Ciena," he wrote. "Optical component maker Avanex (AVNXD) has already issued lower than expected guidance for their fiscal first quarter."

Simon Leopold, a Morgan Keegan analyst who maintained his Outperform rating on the stock in an Aug. 27 earnings preview note, said longer-term prospects should remain solid. "Short-term trends leave us cautious, but we doubt business is as bad as the stock trends suggest, while Street estimates likely come down," he wrote.

The Bottom Line: Buy

A big selloff can go too far, and this stock should get a bit of a bounce. Be ready to sell soon though, since Ciena has offered a darker picture of the next few months than many expected.

Collective Brands (PSS), the parent of discount footwear retailers Payless ShoeSource and Stride Rite, sprinted past Wall Street estimates with strong second-quarter earnings, sending shares up sharply on Thursday.

Although a pair of lawsuits from competitors K-Swiss and Adidas required the Topeka, Kan.-based company to earmark $36.2 million for settlements, Collective Brands reported gains in same-store sales, a tough feat in a depressed retail environment.

Same-store sales for the quarter rose 0.2% throughout the company, and total sales grew 30%, due in large part to the acquisition last fall of Stride Rite, another discount shoe seller.

Susquehanna Financial Group analyst John Shanley said higher average unit retail prices and savings from direct sourcing helped the bottom line.

"These impressive results emphasize how the company's 'House of Brands' strategy is helping to improve comps and improve profitability in a difficult retail environment," he wrote Thursday. "These results are being accomplished through a combination of the consolidation of Stride Rite's back-office operations, international growth, brand extensions, and continued improvements in Payless's retail store productivity."

Shanley said the stock's current discount to the industry average "reflects very low investor expectations for the stock's near-term performance," based largely on its litigation with German footwear giant Adidas. However, he said that would likely be settled out of court, based on Adidas' trademark settlements with Wal-Mart Stores (WMT) and Sears Holdings (SHLD).

The Bottom Line: Buy

This company has set a pace to dominate the low end of the market, and thrifty shoppers will beat a path to its doors looking for footwear bargains.

Hovnanian Enterprises (HOV) saw its shares slide Thursday following a worse than expected loss for its fiscal third quarter.

The results for the Red Bank, N.J.-based national home builder are another sign that the housing crisis has yet to abate, and that property values remain in the midst of a serious readjustment.

"Home building was, is and unfortunately will probably continue to be, a cyclical industry," Chief Executive Ara Hovnanian said in a Thursday conference call. "As a group, the home builders are repeat offenders of overbuilding, and as the market slows under-building so that the market can absorb the overhang of supply. We don't know exactly where we are, but we are certainly near trough production levels of the past three downturns, and we don't know how long we are going to stay near this trough but for certain, at some point, the industry is going to recover and build homes to satisfy the needs of a growing number of households in this country."

David Urani, at Wall Street Strategies, wrote that the picture isn't as bleak for Hovnanian as it appears, and that the company is preparing itself for a healthier market

"Hovnanian reduced its operating loss sequentially by streamlining its expense base and achieving a higher average price per home sold, despite having sold a heavier proportion of its homes in the West, where home prices are still falling rapidly," he wrote Thursday. "Furthermore, inventory impairment charges were 55.5% lower than in the second quarter."

Better times are bound to come eventually, and Hovnanian's CEO says his company will be around to make the most of them -- and will have less competition.

"Once the cyclical trend reverses and we start to build more homes than we did this the previous year, it is likely there will be far fewer home builders around to take advantage of the upswing," he said.

The Bottom Line: Hold

Investors trying to time the housing bottom have gotten burned badly in the past few quarters, but if you still own this stock, you've likely ridden out the worst of it.