Naughty: Gateway

It's a bright, festive time of year, full of decorated trees, sweet candy canes, plump plastic Santas in yards and doorways, and, of course, milling, chaotic crowds at the mall armed with credit cards and coupons and the steadfast realization that the local radio station playing Christmas music 24/7 is already getting on their collective nerves. It's also a time for investors to figure out which stock ideas are worthy of their attention for the coming year. I'd like to talk about one that should definitely be put on your "naughty" list -- that is, it should be avoided for the foreseeable future.

That stock is Gateway (NYSE: GTW  ) . Without a doubt, this stock is, simply put, too risky for any Foolish investor to own. Many individuals might look at its low absolute price and figure it could be cheap, considering that many PC users will upgrade their computers once Microsoft's (Nasdaq: MSFT  ) Windows Vista operating system works its way into the desktop marketplace.

Hey, I'm excited about the appearance of Vista and do think it will help tech stocks -- but Gateway is not the way to participate in the event. Companies that come to mind first would be healthier concerns such as chipmakers Advanced Micro Devices (NYSE: AMD  ) and Intel (Nasdaq: INTC  ) . Or how about Dell (Nasdaq: DELL  ) ? When one thinks of an efficient PC manufacturer/distributor, one thinks of Dell. Hewlett-Packard (NYSE: HPQ  ) is another possibility. Oh, and lest you think me insane, I did not forget the obvious idea -- the aforementioned Mr. Softy itself.

Unfortunately, there's no yuletide cheer for Gateway. It's a lump of coal that has had lots of problems competing with Dell and just can't seem to get its corporate hands around any discernible semblance of cash flow. A check of the latest 10-Q shows that, for the nine-month period, Gateway burned through more than $103 million for its operations -- this compared with operational cash flow of a measly $1.8 million in the previous comparable time frame. Let's peek further into Gateway's financial operating system by checking out data from the most recent 10-K, with numbers in millions.

FY 2003

FY 2004

FY 2005

Net Income

($514.8)

($567.6)

$6.2

Cash From Operating Activities

$72.7

($434.2)

($24.7)

Capital Expenditures

$73.0

$34.5

$45.0

Free Cash Flow

($0.3)

($468.7)

($69.7)

While the company may have greatly improved its net earnings situation, there still is no free cash flow to speak of. And cash is king. In fact, people have looked upon Gateway at times as being an interesting trade from the perspective of its balance sheet -- after all, there is a decent amount of cash and cash equivalents per share. Going back to the latest 10-Q, I calculate that each Gateway stub represents about $1.05 in cash and short-term investments utilizing the diluted share number. As of this writing, the stock is crossing hands at about $2 per share.

Oh, sure, some might see a stock with a nice support, because of its cash cushion. Some might see a stock that makes for a fun, speculative buyout play in this golden era of private equity and hedge funds. I, however, see a company with no cash flow. I see a PC maker that isn't cool anymore (were those cow boxes ever cool?). I see a single-digit stock that could be there for a reason. I see many reasons to stay away.

Gateway is a wounded brand, and it will bring little holiday happiness to a portfolio. I acknowledge that events could conspire to cause the stock to rise, such as a buyout or what have you, but I just feel it is too risky to enter at the moment. Search for the blessing of appreciation in other equities.

More news on Gateway:

There's a whole world of naughty and nice out there!Take a lookat the rest of the bunch.

Microsoft, Intel, and Dell are allInside Valuerecommendations. To see why lead analyst Philip Durell selected them as opportunities, take a free 30-day trial.Dell is also aStock Advisorpick.

Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 2,186 out of 16,262 investors in Motley Fool CAPS. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.


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