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The Microcap Speculator submits: A few readers have requested that I take a look at Advanced Photonics (ticker: API), an opto-electronics manufacturer with a market cap of roughly $47M. API makes photodiodes and instruments utilizing the terahertz spectrum. According to the company, these devices are sold primarily to original equipment manufacturers in the "telecommunication, military/aerospace, industrial sensing, medical, homeland security, and other markets."

API is growing revenues strongly and remains profitable, although earnings are a bit erratic. Last quarter, API's sales increased 56% to $5,077,000 from sales of $3,253,000 in the prior year quarter. The last quarter includes eight weeks' of results from API's most recent acquisition, Picometrix. The Picometrix acquisition positions API well in the field of terahertz instrumentation, which many feel will be the next big frontier in homeland security applications like bomb detection, as well as non-destructive industrial sensors (which has long been API's biggest market). Equally important to this investor, Picometrix had positive net income prior to the acquisition, so it is unlikely to be an earnings drag in the future.

There is enough potential in this stock for me to take a small position, but there are also a number of risks. First, there is an overhang of convertible debt from recent financing. According to the latest 10-Q, part of this debt has already been converted into common stock. Judging by the heavy trading of the common stock, I imagine that these shares are being sold and/or the convert holders are shorting to lock in profits. The common price should remain under pressure until these sales and hedges begin to abate. Second, API has roughly $11M in debt, more than I like to see but not an alarming amount for a company of this size. Third, the retail investors seem overly enthusiastic. Many view this as a positive, but to me it means that high expectations are already priced into the stock. Fourth, the technical picture could be better. API needs a high-volume break out of its recent downtrend. Finally, and perhaps most importantly, API's stock price will not appreciate over the long term unless its supporters are right about the explosive growth potential of the terahertz technology.

DISCLOSURE: I am long API. Not a recommendation to buy or sell any security. For informational and educatonal use only.

Source: From the Mailbag: Advanced Photonics (API)