Shares of Finisar (FNSR) are on the rise after Jefferies analyst James Kisner upgraded the stock to Buy, citing "compelling valuation" and optionality around accretive M&A. As he remains bullish on the entire telecom equipment/wireless sector, the analyst noted that Finisar's recent soft results and guidance stemmed from technical product issues that should be resolved shortly.

VALUATION, CHINA RECOVERY: In a research note this morning, Jefferies' Kisner upgraded Finisar to Buy from Hold given a "compelling" valuation and optionality around accretive M&A. The analyst told investors that the shares' selloff after soft third quarter results and guidance stemmed from technical issues around a particular product that he expects to be resolved within 1-2 quarters, if not sooner. Additionally, Kisner pointed out that he believes recent softness in the shares reflects concerns around a near-term push-out of provincial networks in China. While it seems China has started more slowly this year than anticipated, he is confident that any such pause should be temporary. Overall, the analyst argued that the valuation currently offered by Finisar's shares appears to discount no recovery in China, no resolution of recent technical issues, or further growth opportunities.

FINISAR MAY ACQUIRE OCLARO: Jefferies' Kisner also told investors that he thinks Oclaro (OCLR) offers the most potential upside of all three optical component companies he covers. The analyst noted that his Buy rating and $14 price target on the shares reflect his bullish outlook for the company driven by major secular growth drivers. Furthermore, Kisner highlighted again the possibility of an acquisition of Oclaro by Finisar. Back in December, the analyst had told investors that the former was one of the "more likely potential acquisition targets" for Finisar given significant expense savings potential, incremental capabilities in long-haul optics, and an enterprise value that does not put it the former out of reach for the latter.

OTHERS TO WATCH: Additionally, the analyst reiterated a Buy rating on Lumentum (LITE) as he sees upside from an emerging 3D sensing opportunity for smartphones and other applications.

PRICE ACTION: In morning trading, Finisar has gained about 1% to $26 per share, while Oclaro's stock has advanced almost 4%. Shares of Lumentum also rose 1.5% to $43.75 per share.