Okay, talking to myself tonight and feeling like a thief in the night, I stole this from "The Street.com" RDRT:
Reading right: As I've written in RealMoney.com's Columnist Conversation, the one stock quite a few of my smartest sources are yapping about is Read-Rite (RDRT:Nasdaq - news), the (until very recently) long-forgotten maker of heads for disk drives. The only reason I take it seriously is because of the variety of investors in the stock (from seasoned and savvy traders to some of the most-dogged researchers I know).
Most of the sizzle surrounding the company in recent weeks has been tied to the launch of a new division called Scion Photonics, which is developing optical wafers for use in the fiber-optic networks, and which was initially funded with $25 mil from Tyco Ventures and Roger McNamee's Integral Capital, which got a quarter of the company in return.
But that's only part of the story:
According to Scott Turkel of TCM Partners, who has had his share of hits and misses in this column, and who also happens to be the only on-the-record holder among my sources, the company without Scion is worth about where it trades today, $10.50, or around 1 times sales. "They're completely sold out in their core business in the fourth quarter," he says, "and for the first time, they have pricing power." (One reason is that disk drives are no longer sold mostly for PCs; they've become a staple in storage networks.)
Scion, meanwhile, is currently valued at around $100 million (based on Tyco/Integral's 25% stake). "Chump change," says Turkel. That's because the valuation is without even having a marketable product; the first wafer isn't expected to hit the market until next year (which, I should point out, is why some skeptics are, uh, skeptical).
But another very sharp manager I know, who is often short stocks, said he saw Read-Rite at several recent conferences, and "I thought the story got better between Salomon Smith Barney and Banc of America, both on the optics side and on their base business. They actually showed a slide of the optical wafer prototype they had made; they said they are sampling product with several customers. They said, Our customers have said, 'If you can make them, we'll buy them.' In other words, the move to optical is less theoretical than it was a month ago."
What's more, according to this money manger, who is great at spotting nuances, "They went from saying, 'We'll be break-even cash flow in Q-4 from core businesses,' to saying, 'We are on allocation and we may actually make money in Q4' from the core business.' "
Based on that, Turkel (who first bought the stock when it was $4 not long ago) thinks he now owns a $10 stock that is worth $25.
P.S.: Read-Rite recently paid the first installment of interest on a convertible bond with cash, rather than stock, which was an alternative. (The cash came from the State of Wisconsin Investment Board, already a large Read-Rite investor.) Translation to some investors: The only reason the state paid with cash is because it thinks the stock is going higher. Or, put another way, Wisconsin, which already owns a 20% stake, wouldn't have sunk in even more cash if it didn't think it would make a decent return.
Ken ( I talk to the Treeeeees, but they don't listen to Meeeee) |
