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By Timothy Lutts

Back in October, I wrote the following:

I’ve got an iPhone. In fact, my wife and two of my three kids have iPhones. The iPhone is absolutely wonderful as a portable computer, camera, music player and casual gaming device. I use it to check on stocks, keep notes, view maps, find where I am, figure currency conversions, send instant messages, play Scrabble and more. But the iPhone is a disappointment as a phone . . . and the problem is getting worse, because every new iPhone user (Apple (NASDAQ:AAPL) sells roughly 80,000 iPhones a day) puts greater demands on AT&T’s (NYSE:T) network.

The problem may ease a little when AT&T gets its LTE (4G) network deployed in the years ahead. And it may ease a little more in 2011, when Verizon (NYSE:VZ) starts carrying iPhone traffic.

But I can’t wait, which is why at the top of my Christmas wish list it says, “One femtocell.”

What’s a femtocell?

In short, it’s an in-home cellular tower that covers up to 5,000 square feet, and that connects to your cable or DSL connection, so that your cell phone activity (voice and data) travels on the Internet and not on those crowded airwaves.

It’s not really a tower. It’s really just another plastic box.

Sprint (NYSE:S) and Verizon are already marketing similar devices, under the names Airave and Network Extender, but they only work with 2G handsets, and only for voice calls.

The device AT&T is just beginning to sell, however, is designed specifically for 3G smartphones, so it carries both voice and data. 2G phones can’t use it. Dubbed Microcell, it’s branded with a Cisco (NASDAQ:CSCO) logo, but in fact the innards are probably from ip.access, a non-public company Cisco invested in last year. When you set it up, you can authorize up to 10 phones to use it (so your neighbors can’t piggyback on the signal), and up to four of those authorized phones can use it at any one time. Voice quality is crystal clear. And if you leave the femtocell’s range in the middle of a call, it hands off seamlessly to the regular cellular network. There’s more information on the AT&T Web site.

But I can’t buy one yet. AT&T began selling the Microcell less than a month ago in select markets: Atlanta, San Antonio, Seattle and North Carolina. There’s no word on when it will come to the Boston area, but I’m keeping an eye out.

And I’m betting that when word gets out, demand will be terrific … especially as the AT&T network gets worse with every new iPhone sold.

Plus, I’m not the only one. Over at ThinkFemtocell.com, David Chambers says, “The state of the femtocell market today can be compared to a scene in an action movie, where the large dam has been blown up, the audience is holding its breath waiting for the enormous wall of water to descend, but only a trickle is so far seen to appear.”

Another researcher predicts that femtocells will be a $12 billion market by 2012.

So what’s my stock recommendation? It’s not AT&T and it’s not Cisco. They’re big old slow-growing companies. Their best days as investments ended long ago.

And it’s not Apple though there’s nothing wrong with that idea. One look at the charts of competitors Research in Motion (RIMM) and Nokia (NYSE:NOK) tells you those guys are hurting while Apple is smelling like a rose.

My recommendation is an attempted home-run swing with an unknown little player in the femtocell market, a company whose revenues were just $4.9 million in the second quarter … mainly from non-femtocell electronics.

The company, located here in Massachusetts, has been working with Alcatel-Lucent (NYSE:ALU), Motorola (MOT), Hitachi (HIT), Nokia Siemens, Thompson Electronics and Pirelli … and most of all, Nortel. But Nortel filed for bankruptcy back in January, which not only slowed business down but also made the stock pretty cheap. Since then, Nortel’s relevant intellectual assets have been acquired by Ericsson (NASDAQ:ERIC) (for $1.13 billion), and I have little doubt that Ericsson will be a big player in the femtocell market using this company’s technology.

In the meantime, the company has been recently buying its stock back, a clear indication of how cheap management thinks it is. (It’s currently trading around 7.) Another fan of the stock is Tom Garrity, editor of Cabot Small-Cap Confidential, who recommended the stock back in July, when it was trading at 6.

Here’s a little of what he wrote:

“The average operator’s core traffic, measured in terabytes, is up some 35 times in the past year. Data is flooding the network and carriers are struggling to stay afloat. [Company X] is here to teach them how to swim.

“[Company X's] established relationships with the biggest players in the telecom industry have us imagining a day when its superior technology is not only dominant, but ubiquitous. In other words, we think this company is setting a new industry standard. [Company X's] wireless technologies and its network management software are second to none. Investors have an opportunity here to get in at the beginning of a period of industry-transforming growth of a kind that’s not seen every day.”

Now, back in October, when I first wrote about it here, I couldn’t tell you this little company’s name because it just wouldn’t be fair to our paying subscribers.

Buy today I can. It’s Airvana (AIRV), and the reason I can tell you today is that last Friday a group of private equity investors (combined with current management) announced they’d buy Airvana for $530 million, a premium of 23% over Thursday’s closing price. So the stock zipped up 23% on Friday, and it pulled back a little today.

But here’s the interesting part of the story. Numerous legal firms jumped into the fray immediately. They’re fishing for shareholders to get on board class action suits that claim the buyout price is too low. And editor Tom Garrity agrees; he told his subscribers today to sit tight. He suggests another suitor might emerge and a bidding war might erupt to drive the stock higher. Time will tell.

All I know is that the femtocell story continues to be one of my favorite technology themes. With data-hungry smartphones proliferating around the world, demand is growing for technology like Airvana’s that gets traffic off the airwaves and onto wires.

So if you’re one of the smart, resourceful readers who figured out the identity of Airvana when I wrote about it in October and bought some, congratulations. I suggest you sit tight.

But if you’re part of the vast majority who are just learning about this technology with the potential to solve the smartphone traffic problem, I have a suggestion.

Buy a little AIRV now. The odds are still good that it will inch higher.