3Com and 3 Bucks (and Change)

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Fool readers know that prospects for the telecom equipment industry remain iffy. No one's making much money in this business, and most players, from Alcatel (NYSE: ALA) to JDS Uniphase (Nasdaq: JDSU), are just trying to stay afloat. But with bad news comes opportunity. Investors hear the bathwater is dirty and start throwing out the babies. One of our objectives as, well, objective investors is to keep an eye out for any babies that get tossed. We might just want to adopt one of the tykes for our portfolio.

It was for this reason that back in February I took a look at telecom equipment maker Ciena (Nasdaq: CIEN), with an eye to seeing whether this perpetual money-loser could actually be a Green Gene in disguise. (Read all about it in Is Ciena Really Green? And read all about "Green Genes" -- companies whose market caps are made up almost entirely by their net cash.)

Today, I want to look at another possible Green Gene in the telecom equipment sector. (And no, sorry, Nortel (NYSE: NT) owners. Your company's got nearly as much debt as cash, so it won't be making the cut today.) What I want to look at today is 3Com (Nasdaq: COMS) -- former owner of PalmOne (Nasdaq: PALM) and PalmSource (Nasdaq: PSRC).

3Com reported its fiscal first quarter earnings results on Thursday. Basically, they were more of the same results that fellow Fool Mark Mahorney wrote up three months ago. Despite increasing revenues a hair and drastically cutting its operating costs, the company continued to lose money -- about $0.09 per diluted share. That's a huge improvement over last year's $0.29 deficit, but a loss is still a loss.

What's really intriguing about the company, though, is its cash hoard. Or more generally, its net net working capital (cash + (0.75 * accounts receivable) + (0.50 * inventory) - total liabilities), which is the amount a company would be worth if it shut its doors, collected all the debts it could collect, and held a fire sale of its inventory -- then distributed all the loot to shareholders.

In 3Com's case, the company has net net working capital equal to 60% of its current $1.7 billion market cap. That's close enough to put this company on my value-seeking radar. Before I buy, though, I want to see one of two things happen: Either 3Com must fall in value by another 20-odd percent, or it must reverse its history of negative free cash flow. If either of those happens, that would make 3Com a deep value "buy" for this Fool.

In the market for other undervalued companies to add to your deep-discount portfolio? Try out The Motley Fool's latest newsletter, Inside Value , for one month on our dime. You won't find a better value than that anywhere on the Internet.

Fool contributor Rich Smith owns no shares in any of the companies mentioned here.