Why I Love Synaptics at This Price

Includes: HURN, SYNA
by: Robert Weinstein

Synaptics (NASDAQ:SYNA) went on big time sale.

Wow, SYNA was just hammered Friday in ways that you don't often see in a stock. The only stock that I know of that had what I consider to be bigger action was Huron Consulting (NASDAQ:HURN) and HURN is restating earnings and booted some of the top brass (without pay packages).

What did SYNA do that was so bad as to cause the stock to fall more than 30% in one single day?? Did they miss earnings? (No, they beat earnings) Did revenue fall? (Nope) How about some accounting problems? (Nope). Perhaps they are having trouble getting financing to keep cash flow from drying up? Not at all, they actually retired much of their debt in the last year and have plenty of cash (interest earned relatively went down with interest rates but went UP as a result of more cash on the books).

The crime that SYNA did was they guided lower than expected in terms of revenue. They also committed what the market on Friday called a felony by stating that earnings may be flat due to headwinds in the overall economy. This is a company that is adding staff to grow the R&D and is still able to say that earnings will not be going down.

These are crimes that I feel the jury of the marketplace will soon forgive. SYNA is a company that has growing sales and a non-sky high PE that is not only very reasonable to me but cheap for a growing tech company in great financial shape.

The CEO is stepping down as was announced during the conference call and while that never gives me a warm feeling inside, it's an insider that is taking the helm and it appears that it should be a smooth and planned change in leadership.

SYNA generates a lot of income from the touch screens that are on mobile devices including phones and that is what I consider a very good market to be in right now. SYNA makes touch screens for laptop computers as well but at this very moment in time is not the main driver of profits. I for one happen to think that touch screens for laptops is going to continue to become more and more prevalent as prices come down and awareness of the usefulness of them becomes more common.

Those that follow me know me as a “short” and its well earned. I short more than 95% of my trades and when SYNA first went on my radar, that's what I had in mind to do here. As I started looking at it more and more I realized that for me it would be too risky to short this stock. The selling on Friday appeared to me to be more panic and less about the value of the company being lower.

Basically this stock was on sale because people where selling because they were scared that the price would keep going down. This of course turns into a snowball effect and can get crazy at times as it did with SYNA on Friday.

While it doesn’t “feel” natural to go against the crowd, that's were the biggest gains can be had. The “trick” is to be selective and not be in a hurry to get in as the market can go much further and stay there for longer than most people understand. I feel that SYNA did go much further than is warranted and that value investors will start to see a bargain here.

The other part of SYNA, and its a very important part in getting me to invest in it, is that the short interest on this stock is nothing less than HUGE. With over 40% short interest by the latest numbers this stock is already shorted heavily by my standards. When stocks have this large of a short interest they have the ability to shoot off like bottle rockets when buying does come in. As value investors pick up shares on the cheap sending prices higher the shorts start to cover knowing that the first ones to do so are the ones that get to buy back to cover cheap. This buying causes the prices to move higher which brings in the short term trend followers (traders) which causes more shorts to cover. Rinse and repeat this process and a stock that is down 30% one day can move higher 20% the very next day as well as move higher over time beyond the price of the day before the fall.

I of course do not predict the future just the odds. I feel that the odds are that unless something negative happens going forward that the price of SYNA is currently on sale and that this sale will be ending soon.

Disclosure: Long SYNA