STEC Gets a Vote of Confidence

STEC  (Nasdaq: STEC  ) has to be thrilled that 2012 (and possibly the world) is coming to an end. Year to date, the stock has tumbled more than 42% as, quarter after quarter, earnings reports were dismal for the enterprise-level flash memory maker. For the fourth quarter, we have been told to expect a continuation of the depressing numbers. There is one indicator of strength in this story, though, and it's compelling. Could this big show of confidence from the company's chief executive and a big name investor be enough to excite shareholders for the not-so-near future of STEC?

Poor STEC
It's not fun being a storage provider these days. Just ask Seagate (Nasdaq: STX  ) or Western Digital (Nasdaq: WDC  ) , who have been giving their all to show investors that their business models remain strong in a post-PC universe. Seagate started the year around $16 per  share and rocketed to $32 by May, then sank to $21 in early June, only to recover to a high of $35 per share in August. The stock is currently trading near $25. If anyone out there is still questioning the pricing inefficiencies of Mr. Market, just look at the year-to-date chart for stressed-out Seagate. Western Digital's one-year chart resembles the Himalayas.

For STEC, things haven't been quite as manic -- just depressive. For the third quarter, the company lost $0.24 per share, which actually beat expectations. Revenues were down more than 40%  from the year-ago quarter. This also beat the Street's expectations. It's hard to get excited when a company loses less money than you thought they would, and even more so when management tells you the next quarter will not be an improvement but likely much worse.

For the final quarter of the year, STEC expects to lose between $0.31 and $0.35 per share, which is worse than expected. Revenue is supposed to be in the neighborhood of $36-$40  million.

In addition to its (lack of) performance, STEC suffered from a management snafu when former CEO Manouchehr Moshayedi became the subject of an SEC insider-trading probe. He handed the reins over to his brother Mark, who has been cleared of any involvement.

STEC is a $229  million company with $186 million in cash. At its current $4.91 per share, $3.98  of it is cold, hard moola. To sweeten the deal, there is no debt to speak of on the books. Though the fundamentals have systematically eroded over the past year, the company still resembles an attractive deep-value play. Two other people seem to agree: the CEO and Joel Greenblatt.

Two thumbs up 
Since mid-2011, value investor extraordinaire Joel Greenblatt has been  steadily adding to his position in STEC. The fund manager and creator of "The Magic Formula" currently owns more than 290,000 shares of the company, with the most recent purchase, reported by GuruFocus, of roughly 78,000shares at prices between $6.79 and $9.42. For those of us who put faith in the actions of our revered investors, this is a relatively strong indicator of either a turnaround story, a liquidation play, or a takeover bet.

Now, just because Greenblatt owns some STEC doesn't mean it's automatic gold. It's a small position for the investor, and he is known to invest in hundreds of companies. Still, though, he has increased his position in the last six reported quarters, so there must be some confidence in the notion that STEC is undervalued.

The other, and perhaps more meaningful, vote of confidence comes from a recent open market purchase by current CEO Mark Moshayedi. From Nov. 19 through 21, Moshayedi purchased a total of 137,664shares at prices from $4.07 to $4.50, for a total of approximately $600,000. All in all, 23%of STEC is owned by company insiders and 5% by owners, according to Yahoo! Finance.

Given that STEC will likely continue its fall through the end of the year, and probably into 2013 when the fourth-quarter report becomes available, it's an odd time to be loading up on shares. That notwithstanding, any substantial open market purchase by a company's CEO earns my attention regardless of how poor performance may have been in prior quarters. As many an experienced investor will say, what the company will do next is far more important than what has already occurred.

Using a cleaner metaphor, courtesy of value guru Bruce Berkowitz, if you had a bad meal at a restaurant, and that restaurant then got a new chef, it doesn't make much sense to rate it on the old chef's food.

STEC remains an interesting play and warrants further investigation. This yearlong slide may be coming to an end and could soon be a distant memory.

More from The Motley Fool

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