This Is Cable's Secret Weapon

If you don't know SeaChange International (Nasdaq: SEAC  ) , you're not alone.

It's a small-cap working in the already underfollowed media and entertainment sector. On an average trading day, only $1.4 million worth of SeaChange stock changes hands. Only three analyst firms have an opinion on the stock, and just two of them showed up to ask questions on last week's earnings call.

Yet, the company performs two essential services for broadcasters: media management for their video-on-demand features, and local ad insertion into their live feeds. Competition comes in two flavors; Arris Group (Nasdaq: ARRS  ) and Cisco Systems (Nasdaq: CSCO  ) perform comparable functions largely as side projects to their much broader core operations, and a gaggle of much smaller firms focus on one task at a time. SeaChange is a leader in its particular combination of niches and counts cable giant Comcast (Nasdaq: CMCSA  ) as its largest customer.

In the long term, I expect on-demand services to be the best weapon available in the cable industry's fight for survival against digital media upstarts like Hulu and Netflix (Nasdaq: NFLX  ) , and SeaChange is positioned to benefit greatly from that trend. But in the shorter term, many cable companies seem to treat VOD as the enemy rather than an ally, making it difficult for SeaChange and its rivals to attract the attention of Wall Street and us individual investors.

In the its third-quarter results reported after the bell on Thursday, non-GAAP earnings fell from $0.11 per share to $0.05 per share year-over-year on 8% lower revenue. But management sees this as a temporary slowdown, pointing to much stronger sales in the fourth quarter and more than triple this quarter's earnings. SeaChange produces more than 60% of its sales from recurring subscription services, and there are signs of a stronger end market in North America and other regions.

The time to buy is when there's blood in the streets, and SeaChange certainly fits the ignored, obscure, underfollowed mold that creates some of the greatest investment opportunities. Buy now -- or at least add the stock to your CAPS portfolio -- and reap the benefits when the cable industry runs out of other alternatives.