A Cheap, Cash Rich $4 Tech Stock With Significant Upside

Aug. 5.12 | About: FSI International, (FSII)

I have found recently that the small cap tech space offers some of the best bargains around for patient long term investors. Myriad firms are offering cheap valuations, good growth prospects and solid balance sheets. This $4 selection meets all three of these criteria.

"FSI International, Inc. (FSII) designs, manufactures, markets, and supports equipment used in the fabrication of microelectronics." (Business description from Yahoo Finance)

7 reasons FSII has solid upside from under $4 a share:

  1. The three analysts that cover the stock have price targets ranging from $6.50 to $7.50 a share on FSII, all substantially higher than the current price of the stock.
  2. The company has almost $50mm in net cash on the books, approximately 1/3 of its market capitalization.
  3. Despite the slowdown in tech spending, consensus estimates for FY2012 and FY2013 have been stable over the past month.
  4. Striping out cash, the company is selling at less than 4 times forward earnings, dirt cheap in most investor's books.
  5. Analysts expect almost 50% revenue growth in FY2012 and over a 15% sales increase in FY2013. The stock has a very low five year projected PEG (.49).
  6. The stock has handily beat earnings estimates the last two quarters. Given estimates have come down for this quarter, I would expect the company to surpass consensus when it reports earnings again this month.
  7. FSII is cheap on a comparison basis. Measuring by P/S, P/E and projected five year PEG, FSI International is much cheaper that its larger competitor Lam Research (LRCX).

Note: FSII is a volatile stock (2.09 beta). A good strategy is to acquire shares in small lots during market pullbacks to establish a position.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FSII over the next 72 hours.