Monday, July 18, 2005

Value Stock?
Ticker: 3COM
Price: $3.33
Market Cap: $1.28 billion
Cash: $844 million

Can’t believe this week's report focuses on a tech company, and no, it does not trade below its net current asset value. Too much sun, Clyde? No, sometimes we find potential value plays in strange places. Plus, we like to mix it up here a bit at Cheap Stocks.

You probably all remember networking company 3COM, yet another tech darling whose bubble burst along with many others in late 2000, and early 2001. This stock traded as high as $25 (adjusted for splits) and is now $3.38. But it’s all relative, right? Just because a company once fetched $25 per share, and is now just 1/8 of that amount does not mean it’s cheap. Maybe it’s only worth a buck, and market forces, being as inefficient as they are, were mistaken to price the stock at even $10, let alone $25. So what caught your editor’s attention? To be quite honest, the company recently appeared on the recommended list of the Oxford Club,an institution whose investment intelligence has been outstanding, in my opinion anyway.

That recommendation was the catalyst to begin researching 3Com. What I’ve found is a company that has lost money for eleven straight quarters. Sales have been in a free-fall since 1998, but appear to finally be leveling out. Not quite a pretty picture.

There are two things, however, that I like about 3COM. Several insiders have been buying in the low to mid 3 range. These purchases were reported in April, and are not related to option exercises. (In July there were several option related transactions, as well). The other thing I like about this company—and this dovetails with the insider buying—is the fact that the company has $844 million in cash and marketable securities on its balance sheet, no debt, with a current market cap of $1.28 billion. Buying shares at the current price of $3.33 gets you $2.20 in cash. Theoretically, you are buying the business for $1.13

The risks are great, however. Can the company turn around toward profitability? Fourth quarter 2005 sales were down 4 percent from the same quarter last year, while full year sales were down 7 percent, from $699 million to $ 651 million. Despite a treasuree trove of $844 million in cash, how quickly will the company burn through that? Cash is king, but it evaporates quickly when you are not profitable.

It appears as though Wall Street has all but given up on this company. The majority of analysts covering 3Com rate it as a hold or sell. We like that here a Cheapstocks, in light of the cash balance and insider buying. Wall Street is often wrong. While we are not buying yet, we are interested.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.