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Sycamore Networks (SCMR)

June 11, 2010

This is the next in my series on my current portfolio holdings.

Wow, I can’t believe it. I’m holding a tech stock. That in itself is a novelty; I tend to stay away from technology related businesses because I can never really get my head around the products and services they offer, I don’t feel I can fully evaluate their competitive advantages, the potential impact of obsolescence and the level capital expenditures necessary to maintain market position, not to speak of the fact that they rarely fit into my value profile for potential investments.  However, I have to say that the enthusiasm which sent tech stocks into orbit a decade ago has now fully run its course, and, Wall Street being what it is, that enthusiasm has turned to disenchantment and even disdain. This is the kind of situation that can lead to opportunities for value investors. Today many of the high flyers of 2000 are trading at reasonable valuations and even carry significant amounts of excess cash on the balance sheets. And that’s the case with SCMR.

I don’t pretend to know what SCMR actually produces and sells. According to Yahoo finance ,”Sycamore Networks, Inc. develops and markets intelligent bandwidth management solutions for fixed line and mobile network operators worldwide.” It was a high flyer during the tech boom that ended in 2000, trading as high as $167 per share (the equivalent of $1,670/share compared to todays share price of $17.09 due to a 1:10 reverse split in December 2009) What makes it an interesting investment is  1) it’s selling at barely 75% of cash and marketable securities, 2) it has no debt, 3) it has minimal cash burn, 4) its CEO & President, Daniele Smith, is a major shareholder (6%), and 5) its market cap (and EV) is under $1 billion. Oh, and Third Avenue Management, a respected value investing house, owns almost 25% of the shares outstanding (and has been increasing ownership lately). Over the past month the share price has been trending down and as of yesterday 6/10/10 it closed at $17.09 a share. This isn’t a potential 3 bagger. Revenue is small relative to the asset base; it’s trading at over 7x revenue. The real issue here is that the downside is covered by significant cash and marketable securities ($15.83 and $6.53  per share at the end of April). The upside is that the business might be successful or sold to somebody who thinks they could make it successful. The downside is liquidation with a margin of safety. Management has proven they are shareholder friendly, not giving dilutive options and share grants, conserving cash and even returning cash to shareholders that they feel they can’t deploy (a $1/share – equivalent to $10 post reverse split – dividend in December 2009).  Given the market we are in today, the risk reward on SCMR seems attractive to me. And if the share price continues to drift downward I will continue adding to my position as the margin of safety and the potential return increases.

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From → Positions Closed

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