However, the optical communications markets are highly competitive and constantly evolving. In addition, consolidation in the industry has intensified, leading to more competition and thereby increased pricing pressure. Another matter of concern is customer concentration. Thus, we maintain our Hold recommendation on the shares.

We have approached the valuation scenario based on a number of metrics including, Price/sales, EV/sales and normalized earnings. After hitting a low of less than 1X EV/Sales in 2002, the metric rallied up towards an average of 3X-4X in late-2004. Recently, however, the metric has trended down to an average of 1.0x EV/Sales and based on FY2008 sales estimates, stands at an average of 0.8x EV/Sales.

Based on the potential success of the industry consolidation we think the average could trend up to 1.0X 1.3X EV/Sales and Avanex could warrant a multiple of 0.8x-1.1x EV/sales, which would translate to valuation of $1.30 to $1.50 in the next 6-months horizon.

Keep a Hold on American Capital

American Capital Agency Corp.'s (AGNC) initial public offering (IPO) in May of this year raised net proceeds of $286 million. Shares, originally priced at $20.00 per share, have slipped approximately 17% since the offering. The company is among a handful of new mortgage REITs that will invest exclusively in residential pass through and CMOs that backed are by the U.S. government or government-sponsored agencies.

American Capital Agency has the opportunity to earn good risk-adjusted returns as spreads have widened on agency securities due to the continued problems in residential housing markets. The biggest threat to AGNC near-term is a rise in short-term rates, which we expect as the fed tries to fight inflation. Higher short-term rates will increase the company's costs of funds and make spread investing much less profitable. We maintain our Hold recommendation on the shares.

AGNC is currently trading at 7.2x our 2008 EPS estimates of $2.30 per share. The average P/E for residential mortgage REITs is about 8.5x 2008 estimates and 1.1x book value. Although current estimates for AGNC are highly unreliable due to the company's lack of operating history and the lack of information about the recent $2.5 billion agency security purchase.

deCODE to Trade Sideways

We believe deCODE genetics, Inc. (DCGN) will trend sideways over the next few months as investors await a partnership announcement for one or more of its clinical candidates. The company has launched as many as six diagnostics tests in the recent past; however, we maintain our Hold rating on the stock pending positive impact from the financial performance of these tests.

Incremental revenues from diagnostic tests coupled with cost savings from the reduction in staff will result in a lower cash burn in the coming quarters. We believe the shares offer substantial upside potential, but do not expect significant upward movement in the near term due to risks associated with the company's drug development program. We believe that the risk/reward profile is balanced for investors in deCODE at the current level.

We are optimistic that clinical results will demonstrate the viability of DG-031 for reducing cardiovascular events.