My regular readers (yes, both of them) know that I don't often speak of technology stocks. However, they also know that, other than a general distaste for the retail sector, I don't often discriminate against investing in any arena, provided it holds value and a potentially prosperous future. I believe the company we'll discuss today offers both.

But before we get into that, I'd like to cover how and why this company fits into my portfolio. I share a high-level investing strategy with fellow Fool and friend Tom Jacobs. Actually, it's really more an approach to diversification than a strategy. We basically invest the majority of our portfolios in companies that we deem to be solid, long-term investments, but reserve a sliver for more speculative opportunities.

For me, the idea behind the speculative part of the approach is to identify a value proposition that doesn't typically appear on the screen of a value investor -- in other words, to find those companies that possess a value that isn't necessarily revealed by ratios and multiples. One thing these companies do have in common with typical value stocks, however, is that they are often found in sectors that have been shunned by investors for various reasons.

The rub
If this approach doesn't sound particularly easy to you, you're right. It takes a lot of digging, and it's rare to find more than a few such opportunities a year. But that's what makes it truly worth the effort. The potential upside for these opportunities is great, provided one has the stomach for great risk.

A caveat: The reason I don't speak of this approach more frequently is simply because I don't feel it's appropriate for most investors. First, the approach takes a great deal of research that many don't have the time to perform. Second, as there isn't a very large margin for error with such companies, it takes a high tolerance for risk and acceptance of the fact that you have a decent chance of losing your investment. Third, because opportunities must be chosen with great care, they are few and far between, meaning the approach takes a fair amount of patience and discipline (perhaps not Warren Buffett patience and discipline, but certainly more than some possess).

Now, I don't mean to sound arrogant here, as if I'm saying this strategy is only for experts or intellectuals. I'm simply trying to say that, as is often the case with investing, the approach takes a lot of time and success is frequently determined more by sweat than intellect.

OK, enough disclaimers, let's move on and discuss an actual company that fits the bill for this approach -- a company with problems on the surface, but opportunity beneath it. Enter Atmel (NASDAQ:ATML).

The payoff pitch
Atmel is a company you've probably never heard of, yet it makes chips for many products that you use every day. No, not the sour cream and onion kind -- we're talking semiconductors here. These guys make chips for a huge range of products from cell phones and PDAs to laptops, car stereos, and smart cards.

Of course, the company isn't quite the caliber of an Intel (NASDAQ:INTC) or an AMD (NYSE:AMD), but if it were, we wouldn't be talking about it. It's the firm's status as a player on the fringe -- between a large company and a small one -- that gives us this opportunity.

Having been around since 1984, this chip maker is no late '90s upstart. Granted, that may not sound very old, but it's reasonably mature for a chip maker, being just 16 years younger than grandpa Intel.

Many refer to Atmel as a main competitor of AMD, but product-wise the firm actually has more overlap with Texas Instruments (NYSE:TXN) and Philips (NYSE:PHG).

Atmel's revenue stream is fairly diverse, both on a product and geographic basis. Europe and Asia account for the largest portions of the company's revenue at 38% and 36%, respectively, with North America accounting for 20% and Japan contributing the final 6%.

The semiconductor business requires a great deal of fixed capacity, but once this is in place and these costs are met, a much greater portion of each incremental dollar goes to the bottom line.

Atmel spent millions expanding its manufacturing facilities throughout 2000 and 2001, preparing for demand that never materialized. But with its high-quality facilities and increased capacity ready to go, the company is teetering on the edge of a substantial profit increase. All it needs is the demand, and this finally seems to be materializing.

On Friday, the company reported better than expected second-quarter revenues and encouraged investors by stating that it's beginning to see signs of life in its major markets. The subsequent 15% increase in the stock helped to erase Thursday's 9% decline, which occurred as investors sold the company ahead of its earnings announcement. (The firm has disappointed shareholders in the past few quarters, and it seems folks were expecting more of the same.)

Atmel isn't profitable, but it is cash-flow positive. The company produced $26 million in cash for the second quarter, which it used to pay down debt. This, coupled with its retirement of about $135 million in outstanding bonds, improved the firm's debt-to-equity ratio by 20%. It has $313 million in cash (including about $25 million in restricted cash), and expects to keep between $250 million and $300 million in cash on hand through the end of the year.

Management claims the company could be profitable by the fourth quarter, but it far more likely won't achieve this goal until the first or second quarter of next year. Even so, the stock is attractive when you consider Atmel will be continuing to pay down debt and cut costs between now and then.

I'm not trying to kid you here. This is not a company that's in stellar financial condition or one that's in an industry that's going to set the world on fire in the next 12 months. Certainly, there are still plenty of reasons to like Atmel, but you have to recognize that we're swimming in the deep end of the risk pool here.

I don't know whether or not this market rally or this tech rally is going to continue, but if it doesn't, virtually all things tech are going lower. When you consider that Atmel has a beta approaching 4 (meaning it is four times as volatile as the market) and that the stock has doubled in the past six months, it would be prudent to build a position over time.

The bottom line
Next year, I believe Atmel will emerge as a much leaner, more profitable company with better technology to offer. It is clearly on its way to a brighter future, and the stock is going with it. If demand holds up and the firm keeps getting it right, the shares could more than double in the next 12 months. That's enough reward for me to consider it as a solid speculative play.

I've followed Atmel since 1996, and have been building a position in the stock for the past year. Certainly, its 52-week low of $0.58 was a "back the truck up" kind of price, but again I'd be a bit more cautious here, building a position over time.

I also hold Atmel LEAPS (Long Term Equity Anticipation Securities -- or simply long-term options), and next week I'll discuss the risks and benefits of employing LEAPS in your portfolio.

Finally, for more stock ideas in this area, be sure to check out Beautifully Battered Stocks, written by our very own Rick Munarriz.

Until next week...

Fool On!

Mathew Emmert leaps often, but he's just weird that way. He has beneficial interest in Atmel. If you'd like to see what his other beneficial interests are, check out his profile. The Motley Fool has a disclosure policy.