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Why I have to disagree with Jim Cramer on STEC

|Includes: AAPL, ADBE, DVMT, GOOG, HPQ, IBM, INTC, MSFT, STEC, Inc. (STEC), WDC, WDC

This is my first blog post, and I am an engineer by trade - so bear with me.

As a retail investor, I love watching "Mad Money" on CNBC.  I'm by no means a fanatic, but Mr. Jim Cramer does a wonderful job explaining the nitty gritty of investing that investors like me have read about, but still don't fully understand.  And his methodology of picking stocks, while it may not work for everyone, can at least make the retail investor comfortable getting into the markets.

However, on Thursday, October 7, a caller posed a question about STEC [STEC], and the speculative buyout talk swirling around the stock.  Mr. Cramer remarked that there were plenty of other more likely takeover plays, like Adobe [ADBE] being taken over by Microsoft [MSFT] (personally, I believe that Google [GOOG] would be better served buying Adobe to prevent its flash player from getting on the iPhone, taking a bite out of Apple [AAPL]).  He said that he didn't like STEC's prospects as a company, and couldn't recommend the stock.  This comment was fleeting - it didn't grab a whole lot of airtime or attention (in fact, I didn't even notice it in the written summary for his show).

In the contrarian spirit (and as an STEC shareholder, his comments made me re-examine my holdings), here is why I disagree.

First, the product offerings.  While their ZeusIOPS Solid State Drives (SSDs), which have seen a slight decrease in demand partially as a result of a disagreement with one of their large customers EMC [EMC], are a leap forward in server storage technology, STEC has one other product that may become a larger part of their portfolio in the future.  Their Ultra-Mobile SSD (PCI Express Mini Card) is a fairly impressive piece of engineering.  Current mobile hard drives still use rotating-disk technology, which can lead to slower recall speeds and an increase in overall power demand.  STEC's Mobile SSD helps to mitigate these risks.  The SSD card is about 1/2 the size of a small conventional Hard-Disk Drive (HDD) used in notebooks; 1/4 the size if compared against larger HDDs.

More compelling, however, is the fact that the average power demand of this SSD is under 2 watts (NYSE:W), while the average HDD requires between 10-12 W of power to operate.  As a large portion of battery drain is caused by the computer searching for information on an HDD - the computer has to rapidly spin the HDD to information's location; over time, this drains the battery.  This drastic reduction in power demand can lead to increased battery life - an important performance attribute of netbook and increasingly popular tablet computers.

The only drawback is that these SSDs have a maximum capacity of 64 GB.  However, with the iPad having 64 GB maximum storage and the average business laptop not packing much more, this will only be a deterrent in the case of high-performance laptops that need to access tremendous amounts of data at one time.

The company itself is also on the mend.  They have resolved their dispute with EMC, which has lead to increased orders for new SSDs.  They are beginning to emerge from their extensive restructuring and layoffs as a much leaner company.  The company has begun to post a profit again, and has invested considerably in research and development for new products.  The company is sitting on a sizeable cash pile, with no debt.  These factors make the company look attractive to the retail investor.

The company is trading at $13.44, above it's 52 week low of $9.50, with good support materializing around $11 during recent volatility.  At 15 times earnings, it trades at a substantial discount to the industry average of 22 times earnings.  Their next reporting date comes on November 3.  Should STEC offer a positive surprise, it could spur a dramatic increase in price as the drop in EPS would combine with the general (albeit cautious) multiple expansion taking place in the market (caution may be eased after the elections on November 2).  The PEG value of .94 currently indicates an almost fair-value, but could be driven lower should the company report a positive earnings number.

There has been no shortage of takeover speculation (curiously, no one company has been mentioned specifically as an acquirer).  The company would be attractive to a storage company like Western Digital [WDC] or SanDisk [SNDK] to augment their hard drives both for commercial and retail applications.  It may also be an attractive buy for a device manufacturer such as HP [HPQ] or IBM [IBM].  And Intel [INTC] may continue with its recent M&A activity by making a bid to augment its semiconductor offerings.

With that, Mr. Cramer, I respectfully disagree with your assessment of STEC.  While STEC might not be red hot, the contention that its products have not come into full view / style can be made.  Coupled with their leaner workforce and attractive balance sheet, STEC has positioned themselves to capitalize on the shift towards smaller, more mobile computing platforms, and has made themselves an attractive takeover target for a larger corporation wishing to integrate the SSD technology into their own offerings.

Booyah.

Don't forget to thank your local Soldier, Sailor, Marine, Airman, or Coastie; we live in the home of the free, because of the brave.

Disclosure: Long STEC, AAPL, and INTC; no positions in any other security listed.