Small Cap Stocks

Last evening we noticed that Riley Investment Management LLC) filed a 13G on Stratos International (STLW), reporting an over 8% stake in the company. As you may already now, Stratos remains our top turnaround pick in the fiber optic sector. Our investment case was spelled out some time ago in this post and updated here. The stock still remains ridiculously undervalued, especially considering the recent rise in other larger, and yet paradoxically more "junky", fiber-related stocks.

As is usually the case with our investments, we were a bit early into STLW, and despite what appears to be a stabilized business, with little downside risk, the market has until now firmly disagreed with our assessment, pushing the stock down  nearly 12% since our initial recommendation. However, the company’s latest fiscal first quarter report released last evening confirms our belief that STLW is a low-risk technology play with significant upside over the next few years, and that despite the fact that the earnings statements still are not exciting, the situation looks likely to improve throughout this year and next.

STLW investors should listen to Stratos’s latest earnings conference call, which can be accessed by clicking here.

The call provides a good summary of why we think the stock has low risk at current prices, and significant potential upside should the company report positive earnings sometime over the next 12 months. (Note: The company is already profitable on a cash-flow basis, as can been seen from the recent 10-K).

Notably, the company’s backlog, as of April 2006, was up 20% year-over-year, to $13.7 million. This is the highest backlog in quite some time. In addition, management provided an update on various real estate holdings, which they are in the process of selling. It appears that Steel Partners, who has already offered $7.50 per share for STLW, is pressing management to get a move on with these real estate sales, which could bring in a decent amount of cash to STLW.

STLW reports fiscal first quarter earnings later this month. We’ll be looking for signs of top-line growth, continued cash generation, and progress on various shareholder-value initiatives, including any recent share buybacks given the dip in the stock price.

Please Note: We first recommended STLW at $6.80, and still hold a position in the
stock. All ideas, opinions, and/or forecasts, expressed or implied
herein, are for informational purposes only and should not be construed
as a recommendation to invest, trade, and/or speculate in the markets.
Any investments, trades, and/or speculations made in light of the
ideas, opinions, and/or forecasts, expressed or implied herein, are
committed at your own risk, financial or otherwise.

I believe that Stratos International (STLW) is an excellent low risk investment "gamble" at its current price of about $6.80, with potentially good odds of providing investors with an above average market return over the next year or two.

Before reading on, please note that STLW is extremely thinly traded, so if you plan to invest in this company, you should use limits. Also, as always, please read the disclaimer at the end of this post.