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I made some waves recently by disclosing my sale in Sirius XM (NASDAQ:SIRI) ahead of earnings. The irony here is that now I'm going to use the stock as an example to make the case for another company, Atmel (NASDAQ:ATML), that has recently suffered some similar symptoms of value - or lack thereof. As a value investor I can tell you first hand that it is a daunting task to find stocks trading on the market at a discount to its potential.

Often times, the moment that you have figured it out, it is too late. A lot of the difficulty has had to do with the market's rapid shift between trends as well as how it applies and adjusts the definition of value. Sirius XM proved several years ago that it had value when very few in the market could see its potential when it reached 5 cents in 2009.

Considering Atmel

Atmel is one company that has recently caught my attention this year for the mere fact that it had been beaten up for most of 2011. So far in 2012, it seems that it has taken on some new life. The company has seen its shares erode (in part) due to the declines in the market, but also due to some failures in execution by its management. But at its current valuation, it looks like a steal considering it is trading below its book value and its potential for at least 50 percent more upside.

The company disappointed investors when it reported Q3 earnings results. Though it announced a 15 percent increase in revenue from the previous year, that number was flat on a quarter to quarter basis. Management attributed the less than stellar numbers (in part) to the fact that its major customers - namely Dell (NASDAQ:DELL) and Samsung (OTC:SSNLF) - could not compete in tablets sales with Apple's (NASDAQ:AAPL) iPad. But that is not a huge surprise. What is disappointing is that it did not see this coming and make the necessary adjustments. To make matters worse, not only did it miss its projected revenue goals, but it also guided much lower for Q4.

This was that one-two punch that has caused it to hover near its 52-week low for the past several sessions. But it is hard to think it can go much lower. As a value investor I tend to see this share weakness as an opportunity or as the theme of this article suggests - a second chance. The reality is Atmel has been and will continue to be a great name in its space.

The Apple Effect

Upon learning of Apple's shot heard 'round the world, I immediately began scouring the market for companies that may stand to benefit from its so-called "halo effect." This is the idea that Apple's success can potentially spill over to other companies that, for any reason - whether directly or indirectly - are a part of its ecosystem. One of the two companies that I came up with was ARM Holdings (NASDAQ:ARMH), and the other was Atmel.

The reason is basically the fact that Atmel competes in a wide variety of markets in the chip industry. The company's products include microcontrollers, programmable logic devices, and a wide range of proprietary system-on-chips and nonvolatile memory chips. The company manufactured about 93% of its own chips in 2007. It sells its products into many different end markets, including communications, consumer electronics, computing, and automotive.

Granted, as has been the case for most tech companies, it has had its own fundamental challenges at the onset of the recession. But not all companies succeed in self-improvement to the extent that Atmel has. This modest semiconductor company is a good example of the rewards that can accrue when patient shareholders and committed management intersect. From a fundamental standpoint, Atmel has outpaced its peers over the past several quarters. Their microcontroller business is healthy, and though I have pointed out the benefit of it being a part of Apple's ecosystem, it is worth noting that Atmel is also gaining share in the non-Apple gadget market, as well as with its line of maXTouch controllers, which run the touch-screen interfaces on several devices.

To further consider the company as a turnaround story, you should read an article by Seeking Alpha contributor Bert Wilkison, in which he made the following points:

  • In the last two weeks alone, the company has launched a complete digital audio platform for consumer applications, cost effective LF-RFID IC for animal identification applications, an industry first single-package microcontroller with LF-RFID reader and most importantly produced a capacitive touch controller with an industry best proximity sensing range.
  • The highest sell-side analyst's 12-month price target sits at $18.00, representing a 116% to current levels. With 462.6M shares out, Atmel's institutional ownership stands at 79% (a quarter over quarter decrease) and the most recent reported short interest is about 10.7M shares (a bi-weekly increase).

There is some speculation that the company will be releasing details of new leading-edge products and potential new business partnerships to go along with contract extensions and reports of existing technology improvements at some point during the year.

Summary

As the market continues to rebound, Atmel may easily double in value during the course of the next 12 months. While second chances don't always present themselves, passing on these growth stories more than once is reason enough to make me question my own investment abilities. For value investors that are willing to be patient, Atmel deserves a long look right here.

Source: Catch Atmel As It Heads Toward $16