Big-Money Investors Bet on This Bargain

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: ADPT (Other OTC: ADPT.PK). Are institutions bullish or bearish when it comes to this holding entity for the data-storage specialist once known as Adaptec?

Foolish facts

Metric

ADPT

CAPS stars (out of 5) ***
Total ratings 166
Percent bulls 84.3%
Percent bears 15.7%
Bullish pitches 24 out of 28
Highest rated peers Key Tronic, Concurrent Computer, Super Micro Computer

Data current as of Jan. 23.

Before it became the holding company known as ADPT, Adaptec specialized in connecting computers to storage devices in a multitude of ways. From SCSI to Fibre Channel to FireWire, disk arrays and switches adopted many standards for moving 1s and 0s.

Adaptec's original specialty was SCSI, which for years was a popular interconnection standard for PCs. But the rise of newer standards such as USB and SATA cut into SCSI's use, taking a toll on Adaptec's channel connect business. Most of what was left of it was sold to PMC-Sierra (Nasdaq: PMCS  ) last year for $34 million.

If you're thinking the sale gutted the company, you're wrong. ADPT is sitting on $3.29 per share in cash, yet trades for $2.88 a stub. Today's investors are buying at a 12% discount to the company's minimum liquidation value.

"At today's [$2.88], 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," wrote Motley Fool Special Ops lead advisor Tom Jacobs in naming ADPT to our "11 O'Clock Stocks" portfolio in September.

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Dimensional Fund Advisors

9,791,284

10,332,972

10,201,718

10,201,718

BlackRock

343,500

382,518

8,952,116

9,052,846

Renaissance Technologies

9,534,100

9,073,500

8,152,666

8,152,666

GAMCO Investors

-

-

432,500

5,506,400

Mackenzie Financial

-

-

-

3,500,000

TOP 25 TOTAL

35,449,187

30,993,927

42,763,002

54,365,218

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Big Money investors would appear to agree with Tom's thesis. At the very least, they believe activist investor Steel Partners, which owns 32% of the shares outstanding, will unlock value via a sale. The top 25 institutions have purchased more than 11 million shares over the past year.

They have good reason to buy now. Not only is ADPT blessed with a generous cash balance, but as of last March, the company was sitting on more than $320 million in net operating losses, which it could use to offset federal and state corporate tax payments.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

ADPT 42.85% 0.41%
Cirrus Logic (Nasdaq: CRUS  ) 72.21% 5.31%
LSI (NYSE: LSI  ) 78% 0.23%
Rambus (Nasdaq: RMBS  ) 45.48% 4.09%
Silicon Image (Nasdaq: SIMG  ) 70.45% 1.52%

Source: Capital IQ. Data current as of Jan. 23.

Of this list, Cirrus Logic and Rambus have the best ownership profiles. Both companies have engaged insider owners yet maintain low enough institutional ownership to leave room for new Big Money buyers.

Where does ADPT fit? Perhaps nowhere. There's only one ADPT shareholder that other investors should care about: Steel Partners. Whatever Steel wants matters most, and what Steel wants is a sale. I think it'll get its wish, which is why I've rated the stock to outperform in my CAPS portfolio.

Do you agree? Disagree? Let us know what you think about ADPT using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

What will be this year's top stock? We've got a good idea. The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Interested in more info on the stocks mentioned in this story? Add ADPT, Cirrus Logic, LSI, PMC-Sierra, Rambus, or Silicon Image to your watchlist. You can also try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Cirrus Logic and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


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