Cheap $5 Tech Stock Has Insider Buying And Could Be Potential Acquisition Target

Jun.17.12 | About: Brocade Communications (BRCD)

Very few stocks in the tech sector are cheaper right now than Brocade Communications (NASDAQ:BRCD). In addition to rock bottom valuations, it has picked some new insider buying recently and there is a decent chance it will eventually be acquired given the interest in the data storage space.

"Brocade Communications Systems engages in the supply of Internet protocol based Ethernet networking solutions and storage area networking (NYSE:SAN) solutions." (Business description from Yahoo Finance)

7 reasons BRCD is undervalued at under $5 a share:

  1. The stock is selling near the bottom of its five year valuation range based on P/E, P/B, P/S and P/CF.
  2. The CEO bought $500K in new shares in June.
  3. Given the amount of M&A activity in the data storage space (57% of Brocade's revenues), it would not be surprising to see the company become a target. Dell (NASDAQ:DELL) has already taken a look at the company and Oracle (NYSE:ORCL) has also been speculated as a potential suitor.
  4. The company has beat earnings estimates twelve straight quarters and the average beat over consensus during the last four quarters has been north of 34%.
  5. In addition, consensus estimates for FY2012 and FY2013 have gone up over the last month.
  6. The stock is cheap at just 93% of book value and under 8 times forward earnings, a discount to its five year average (11.4).
  7. The company almost quadrupled cash flow from FY2009 to FY2011, and the stock sells for less than 5 times OCF.

Disclosure: I am long ORCL.