Chicago, IL – October 9, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Ciena Corporation (CIEN), Nortel Networks (NRTLQ), Ericsson (ERIC), Nokia (NOK) and Siemens (SI).

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Here are highlights from Thursday’s Analyst Blog:

Ciena Takes Over Nortel Unit

Yesterday, telecommunications and network equipment company Ciena Corporation (CIEN) announced the acquisition of substantially all of the optical networking and carrier Ethernet assets of its rival Nortel Networks’ (NRTLQ) Metro Ethernet Networks (MEN) division, for a total of $521 million ($390 million in cash and 10 million in shares worth $131 million based on the Oct. 6 market price).

Ciena will take over Nortel’s long-haul optical transport portfolio, metro optical Ethernet switching and transport solutions, Ethernet transport, aggregation and switching technology, multiservice SONET/SDH product families and network management software products.

Moreover, Ciena expects to incur integration-related costs of approximately $180 million, the majority of which will be paid in 2010 and expects the transaction to be significantly accretive in fiscal 2011.

Nortel had filed for bankruptcy protection back in January in Canada, and has since then planned to sell off its assets. Nortel had sold its wireless carrier business to Sweden's Ericsson (ERIC) for $1.13 billion in July. This was followed by the sale of its Enterprise unit to Avaya for $915 million.

Ciena is expected to employ at least 2,000, or 85% of Nortel employees. The acquisition would significantly enhance Ciena’s existing Canadian development resources, making Ottawa the company’s largest product and development center. Deutsche Bank Securities Inc. and Foros Securities LLC served as financial advisors in the deal.

Ciena’s Carrier Ethernet platform enables differentiation and provides a competitive advantage to the company. We believe the deal could provide strong growth potential to Ciena’s rapidly expanding metro Ethernet business and optical networking products.

For the third quarter, Ciena generated approximately 14% of total revenue from metro Ethernet products. The company expects the Ethernet division to be a major contributor to growth, going forward. Besides, the merger could double Ciena’s revenue. Ciena had total revenue of f $902 million in 2008, while Nortel’s Ethernet business generated $1.36 billion in revenue in 2008 and $556 million in the first six months of 2009.

Moreover, the acquisition would provide tough competition to other players in the networking industry such as Ericsson, Nokia (NOK) and Siemens (SI). Longer-term, we view the deal to be positive for Ciena.

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Before we begin, let's explain the contrarian stance that makes Schaeffer's so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.

However, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator – like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings.

The Unusually High Option Volume Screener

This filter is somewhat self-explanatory. It looks for stocks with single-day option volume in excess of their average volume over the last month. Why is this important? Simply put, this filter allows us to read how options traders feel about a certain stock, and sometimes unusually heavy option activity can be the sign of an event (such as earnings or merger-and-acquisition news) or, occasionally, a reversal of sentiment in the options pits.

Both bullish and bearish bets rev higher

As mentioned above, MGA piqued my interest due to its unusually high option activity last Thursday. After further research, it seems that options speculators from both sides of the Street targeted the Canada-based car company.

On the bears' side, the security saw roughly 20,000 puts change hands – almost 13 times its average daily volume of about 1,500 contracts. However, the bulls outnumbered their put-focused rivals, as MGA saw nearly 33,000 calls cross the tape Thursday – more than 20 times its average daily volume of 1,636 contracts.

The bullish bias among options bettors is further reflected in the stock's Schaeffer's put/call open interest ratio (SOIR), which measures options slated to expire within 3 months. On Monday, December 1, the equity's SOIR stood at 13.79 (in the 93rd annual percentile), signaling that near-term puts were nearly 14 times more popular than their call rivals. However, MGA's SOIR as of last Friday stood at only 1.15 (in the 45th annual percentile), indicating that optimism among short-term options speculators is escalating at a robust pace.

Digging deeper into Thursday's influx of bullish bets, it seems that options players honed in on the stock's January 30 call. This strike added more than 25,000 calls Thursday alone, making it home to peak call open interest in the January series of options. On the flip side, bearish bettors centered on MGA's January 25 put, with roughly 3,000 contracts added to open interest.

Now, I have only 2 questions: Why the recent popularity of MGA options, and is the increasing optimism among options traders warranted?

A potential bailout, eh?

Searching for a catalyst behind the recent surge in option volume, it seems that Magna investors could be responding to a potential bailout for the Canadian auto industry. While Detroit's Big Three automakers have been pleading their cases on Capitol Hill, car concerns across Canada have followed suit, asking Parliament for federal aid.

One significant difference between the U.S. Congressional and the Canadian Parliament's debates, however, is timing. While American officials are debating a potential bailout this week, the talks in Canada could be delayed by political turmoil in Ottawa. According to reports, those opposing federal aid for automakers have joined forces and are threatening to defeat the minority Conservative government, which could result in a temporary suspension of Parliament.

Meanwhile, options players could also be responding to news that Magna will close an auto-parts plant in the province of Nova Scotia next year, resulting in 260 lost jobs. Coincidentally, the aforementioned plant produces powertrain parts, primarily for Detroit-based General Motors (GM). The latest casualty comes about a week after another Magna unit announced plans to shut down 2 plants in Ontario, resulting in 850 unemployed workers.

The company said the decision came in the wake of an evaluation of the plant's current financial status, future business outlook, and unused capacity at other facilities. "Those factors, combined with the difficult economic conditions facing the North American auto industry... have made the manufacturing facility no longer viable," a press release stated.

Stalling on the charts

Underscoring the difficulty for Magna of late is the stock's recent performance on the charts. During the past 60 trading sessions, shares of MGA have underperformed the S&P 500 Index (SPX) by about 28%.

From a more historical perspective, since perforating long-term support in the 65-to-70 region in June, the security has embarked on a quest for new lows, pressured into the red by resistance from its 10-month moving average. Backpedaling roughly 75% from its October 2007 high near the century mark, the equity is now floating in the 25-to-30 neighborhood.

Word on the Street

However, despite MGA's recent fall from grace on the charts, the options arena isn't the only place abundant with lingering optimism. According to Zacks, the security still harbors 4 "buy" or better ratings, compared to 8 "holds" and a lone "sell."

The bottom line

Regardless of the equity's technical turmoil of late, it seems optimism toward MGA is on the rise – especially in the options pits. However, this bullish bias could actually hurt the stock, should bailout-related news (or lack thereof) fuel its descent into the red. A reversal in sentiment among options players, or a fresh round of downgrades and/or price-target cuts, could further exacerbate the already struggling security's year-to-date losses.

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Zacks Investment Research