Today's Buy Opportunity: ADPT

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ADPT (OTC: ADPT.PK), formerly known as Adaptec, is a "tech" company that makes all sorts of things we don't understand and have no business pretending we do. But fortunately, it doesn't matter -- and yet, it's still quite Foolish!

Buying this stock puts you on the side of ADPT's largest shareholder, Steel Partners, an activist investment firm that  now manages the company and explicitly intends to sell it and profit from its tax losses. You can buy today at less than net cash per share and endure a very small cash burn while you wait for Steel Partners to bring you gains.

Steel Partners won control of the company in October 2009, and it was quite a battle, which is why they are called "activists." Two months later ADPT announced they hired Blackstone Advisory Partners to assist with the sale of assets or operations. The express goal of current management is to wind down or sell the existing businesses and assets, from its wholly owned Aristos Logic Corp., to non-core patent portfolio and real estate, and maximize the value of its net operating loss carry forwards ("NOLs," as opposed to "LOLs"). Its first step came in June 2010, when the company closed the sale of its data storage hardware and software business to PMC-Sierra (Nasdaq: PMCS  ) for $34 million, about $0.25 a share.

Downside and up
I invest by estimating risk and reward. My service, Motley Fool Special Ops will take any risk for which the return adequately compensates -- and the more the downside risk, the better that potential return must be. Think of us as people who haunt the stock race track, handicapping stock horses or their jockeys.

By focusing on risk, however, value investors often come across as stodgy. We differ. Actually, speculators and high-growth investors unwittingly accept way too little potential return for the huge risk of loss they take.

Thus I lick my lips at ADPT. After selling a piece of the business to PMC-Sierra for $34 million, the company has $3.23/share in cash. Management watches every last penny, but there is still about an average $5 million per quarter in cash burn. Assuming that continues, we must allow for a $0.16 reduction -- $20 million across 120 million shares -- per year. At today’s $2.90, it would be more than two years before net cash per share came down to this buy price! Of course, companies have traded and will sometimes trade below net cash -- and a discount is warranted here given the burn, however slight -- but it’s a still a most excellent margin of safety.

This is why this is so favorable a risk-reward situation. If you buy below net cash per share and the burn is manageable, you can afford to wait for management to bring you profits. The upside is almost free. And so long as net cash is higher than the share price, you are in effect being paid to take the potential gain.

Not all skittles and beer
Not that there aren't any risks -- there always are. Maybe Steel Partners got this one wrong. Maybe ADPT spent millions over years buying up companies that no one wants. All the companies ADPT spent years buying up, maybe they're worthless and all a shareholder owns is a slowly dwindling cash pile and some funny tax thingies. It could happen.

That's why it's best to buy at less than net cash and watch the cash burn closely. If the burn turns into a conflagration, it's time to sell.

The Foolish bottom line
This is an extremely special situation: Buy at less than net cash per share where cash burn is limited, and wait for management to act for its and your benefit. It's like holding cash with the benefit of stock-like profits!

Previous recommendations:

Come back to Fool.com tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! To see the performance of previous recommendations, click here.

The Motley Fool will wait at least 24 hours after this publication before buying shares of ADPT. To see an FAQ on "11 O'Clock Stock," click here.

Tom Jacobs is the lead advisor for Motley Fool Special Ops, a special situations and opportunistic value service. He owns no shares of companies mentioned here.The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 02, 2010, at 6:04 PM, sfalk949611 wrote:

    I like what you are saying and am taking a risk. please, out there, keep me posted on your thoughts too.

  • Report this Comment On September 03, 2010, at 1:34 PM, KZMike wrote:

    So, if I am correct in the logic behind this 'pick' we should expect [if all goes according to 'the plan'] either a rise in the price of the stock or a 'cash' distribution when the doors are closed. . .???

  • Report this Comment On September 08, 2010, at 10:35 PM, aleax wrote:

    This is an interesting suggestion (and I'm not normally one to go for "penny stocks"!-), but after all my due research I just can't pin down the _potential_ *upside* -- are we talking (assuming none of the risks materialize) about potential gains of 30%? 60%? 90%? Any idea how we might assess this...?

  • Report this Comment On September 09, 2010, at 8:08 PM, hbofbyu wrote:

    Tom,

    I'm a rookie at this stuff. How does my stock benefit if the company gets liquidated? Is it possible that my common shares could be worthless while management has preferred shares that get the payout form the sale of the assets?

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