Buy, Sell, or Hold JDS Uniphase Today?

If you like steady, predictable stocks and hate roller-coaster rides, optical networker JDS Uniphase (Nasdaq: JDSU  ) isn't for you. It just isn't. This chart has danced between $8.59 and $29.12 per share over the last year, including a quick doubling in the first six weeks followed by a long 60% drop.

As we turn our gaze on 2012, the thrill ride is very likely to continue -- but is JDSU climbing another 80-foot hill or getting ready for even deeper plunges?

Let's have a look at some reasons to buy, sell, or hold JDS Uniphase today.

Buy:

• Diversification: The company is a giant in optical networking components such as optical signal switchers and tunable lasers, but makes just as much money by selling communications testing and measurement products. There's also a smaller division selling optical and holographic technologies for uses that have nothing to do with networking. This diversity makes JDSU less vulnerable to downturns in a single market.
• Improving margins: Profit margins have been improving almost across the board in recent years and quarters (we'll get back to the exceptions in a minute). A steady flow of new products combined with a flexible third-party manufacturing model are helping here.

Sell:

• Still expensive: Even after that terrible drop throughout 2011, JDSU still trades at 38 times trailing earnings. Measurement rival Agilent (NYSE: A  ) can be had at a trailing P/E of just 12.5 and even highflier Finisar's (Nasdaq: FNSR  ) 30.3 looks affordable by comparison.
• That missing margin: The one profitability measure that isn't moving north is the free cash flow take. Though the company is creating plenty of operating cash, most of it is spent on expensive capital projects nowadays. Cash flows are kind of a big deal to Fools, so this trend isn't to be taken lightly.
• Concentrated risk: Most of JDSU's laser products are made by a single contract manufacturer, putting about half of company revenues in the hands of Fabrinet (NYSE: FN  ) . As if to underscore that significant risk, the Fabrinet facility in Thailand where much of the JDSU manufacturing goes on was surrounded by high waters but not flooded during this fall's massive inundation. Will these guys be as lucky the next time?

Hold:

• Market opportunity: High-speed networking is a major storyline nowadays as mobile and cloud computing put new strains on the Internet's infrastructure. JDSU plays a large part in that market from two different angles, and will most certainly rise when network builders get back to expanding their capacity. That might not happen in 2012, but it would be a shame to sell at the wrong time and thus miss the starting gun.

The verdict, please:
I'm a long-term bull on JDSU and many other high-speed networking stocks. The high backward-looking P/E ratio notwithstanding, I wouldn't mind picking up a few shares here. It's a buy, but not a back-up-the-truck slam dunk. I'm backing up that call by placing an "outperform" CAPScall on JDSU right now.

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