Sycamore Networks (OTC:SCMR) hit a new 52-week low and has been trending downward for some time. It’s now nearly 44% off its 52-week highs. This has been a favorite of Marty Whitman and Third Avenue Management for years. I first found out about the stock through one of Whitman’s quarterly letters a few years ago. Third Avenue owns about 15% of the outstanding shares. Most recently, one of my favorite hedge fund managers, Seth Klarman, dipped his toes in the water and opened up a small tracking position in Q1 of this year.
The company was founded in 1998 as a telecommunications equipment company. Unfortunately, throughout its history it has only been profitable in one year, 2006. The company’s saving grace was luck and timing. At the height of the internet bubble, the company was able to raise $1 billion from its IPO and a secondary. It’s largely held on to that hoard, other than to return some to its shareholders and to conservatively burn through it for business.
For the shareholders, Sycamore issued a $1 special dividend in late 2009. It then reverse split its stock 1 for 10. Shares are now under $20 and at the time of the dividend would have been about the equivalent of $30.
For its business, the company is pushing something it calls IQstream Mobile Broadband Optimization. This is supposed to optimize content in some way. This technology certainly isn’t my specialty and I won’t pretend to understand it. Despite this new push, the company is still burning through cash. For the nine months ended April 30, the company lost about $14 million, slightly better than the year before.
Its technology isn’t what I’m interested in, though. My focus is on its balance sheet. At the end of April 30, it still had $442.5 million of cash and investments. That works out to about $15.50 of cash and investment per share. With no debt and little cash burn, this level should act as a floor for the stock. CEO Daniel Smith owns 5.7% of the outstanding shares, so his interests are aligned with the interests of investors and prevent any significantly irrational expense.
When the stock was trading in the mid-$20s it didn’t make sense to own it while the prospects for profitability were low. Now that we’re below $20 and seemingly fast approaching the net cash level, any unexpected reduction in losses or prospect for a profitable quarter should cause the stock to jump. Keep in mind, it's spending $6 million per quarter on research and development. That’s its major expense and the primary cause of its $3.7 million loss last quarter. That and poor revenue, of course. My point is that if the product isn’t working, it doesn’t have large fixed costs, so it’s unlikely the stock will trade lower than the net-net level for a long period of time.
I don’t currently own the stock, though I did in late 2009. I wrote about the holding in my firm’s first quarterly letter in Q4 2009. I have been following the company closely through the years, and would probably begin opening up a position again if it drops below $18.