“Sometimes you have to look under the hood to find the best opportunities …”

Sniffing out a pick from Cabot Small-Cap Confidential

By Travis Johnson, Stock Gumshoe, October 29, 2009

It seems like the folks at Cabot Heritage have been getting a lot of attention for the success of their China-focused newsletter lately, which has apparently led a lot of my readers to take some interest in them … which, in turn, means that when they spit out a wee teaser in one of their free email blasts, I get lots of questions about it.

So … not to spoil the surprise, but that’s the situation today. A recent issue of the free market letter from Cabot teased a stock that ran up quickly in October and then fell back, and the folks at Cabot Small-Cap Confidential think now’s a good opportunity to be buying more. Just to be clear, this is not the China letter that has done so well for Cabot in recent years, this is a letter that, you’ll be unsurprised to hear, looks for little-known small cap names — the editor, Tom Garrity, has recently said that he’s been focusing on technology, health care, and alternative energy ideas, and the stock that was teased for this letter just a week or two ago, our little friend the femtocell maker, was indeed in “technology.”

As is this one. Here’s the tease we get this week:

“More recently–in fact just last month–Tom recommended a young company that designs customizable semiconductor chips for mobile communication devices.

“He wrote, “The company partners with clients to create customer-specific standard products, or CSSPs, that speed up the process of new device development. It’s not a glamour stock–you can’t really see their products, and we challenge you to describe them to a friend–but they’re pivotal to the developers of all those new smartphones, Netbooks and MIDs that are flooding the market. Sometimes you have to look under the hood to find the best opportunities.”

“Since then–and this is less than a month ago–the stock has soared from $1.95 to $3.40. As I write, it’s been pulled back down to $2.40 by the market correction, which means Tom’s subscribers’ profits are about 24% (in less than a month) and that it’s time to buy a little more as this correction ends. (You’ll learn the name of this high-potential new recommendation when you sign up.)”

Well, I can’t tell you how delighted I am to hear that this correction is going to end — that’s good news. So who is the company we should be buying here? According to these clues I can tell you that this must be …

QuickLogic (QUIK) [Free Trend Analysis from INO]

There are at least dozens of small, publicly traded fabless semiconductor shops that appear to have somewhat similar businesses to QuickLogic, and there are many larger companies that serve the same markets with slightly different products (Texas Instruments, Xilinx, LSI and many more), but one of the things that distinguishes them is indeed their relatively new Customer Specific Standard Product (CSSP) lineup — it’s essentially a way of helping companies design and build small mobile devices more quickly and easily, they have a set group of little modules that they can build into any chip, the company designing the phone (or whatever it is) adds whatever capabilities they need (USB connector, Wifi, etc.) and gets some space for the programmable bits of the brains, and voila! a custom chip. It makes sense — it’s sort of like the difference between buying the car you like, choosing the engine and color and transmission, and adding on all the available options you think you’ll need; and building a custom car from scratch. It obviously takes longer and costs more to design a new chip from scratch than to pick and choose from popular options and customize just a part of the chip, and, perhaps more importantly, this design strategy can apparently help to save space and power, both of which are at a premium inside all mobile devices. If you’d like to see their argument for why their strategy will succeed, they have a pretty good investor presentation that’s worth a quick read [pdf file].

That’s not to say that this is a guaranteed home run, of course, and I doubt even Garrity would claim that — but CSSP is really a terminology that’s fairly specific to QuickLogic and the price pattern over the past month does match the tease, so I’m fairly certain that this is the stock he’s teasing today. In terms of the price action, this newsletter publishes on the first Friday of each month, so the most recent recommendation would have come out on October 2 — I assume it probably comes out after the market close, the stock closed that day at $1.73, then opened Monday at $1.80 and shot to $2.12 for an intraday high, and $1.95 is just about midway between the high and low on Monday, so that’s a reasonable price to use. The high for this past month was a hair under $3.40, it hit $3.39 for an intraday high on October 20 … again, probably reasonable enough to match.

QuickLogic is fabless, like many of the other semiconductor firms (meaning that it designs, it doesn’t mass-produce — they probably offload that work to the big fabricators in Taiwan and China, I imagine), so they don’t have huge capital requirements. That doesn’t necessarily make them stand out as very different, but it does offer some encouragement when you note how tiny they are, and how much money they’ve been losing. The firm seems to be well into their switch to offering this CSSP product, they had previously specialized in a particular type of Field-Programmable Gate Array (FPGA) but apparently had trouble growing or differentiating in that segment so they’re trying to carve out a new little niche of their own.

They just released their earnings on Tuesday, and they’re still clearly in the transition — whether they are able to build a big business with their CSSP designs, as they hope, with the major tier one device manufacturers is probably still up in the air, but they are making progress. At the same time, their older, mature products are declining pretty quickly — their biggest customer was Honeywell, for chips that went into avionics and industrial gear, so it probably won’t be a big surprise that they’re not expecting a quick return to high sales in that department. You can see the earnings press release here, and the transcript of their conference call here if you’re interested. They are not profitable and analysts don’t think they will be profitable in 2010, either, but they do have operating margins that are in the neighborhood of 45-50% and would, one imagines, improve if they are able to scale up sales. They lost about $3.2 million in the last quarter, but they do have a decent cash cushion (they are really tiny — market cap is about $75 million and they have about $13 million in net cash).

Oh, and the stock is already bouncing higher — thanks, perhaps, to the extra attention from Cabot readers or new subscribers, or to other folks who have been searching for the name of the company. It’s down smartly from those highs of around $3.40, but it has gotten as high as $2.50 this morning after opening at $2.23, so if you’re thinking about buying this one I’d be prepared for a wild ride. Enjoy!


Related Gumshoe Articles

Leave a Reply

3 Comments on "“Sometimes you have to look under the hood to find the best opportunities …”"

avatar

Mark Bohana
Guest
0
Mark Bohana
October 29, 2009 1:22 pm
CSSP as indicated is probably a unique name for Quicklogic. This product is nothing new and has been around for at least the past 20years. In a previous life, I have sold semiconductors for 35 years, and one of our products was ASIC, or application specific integrated component. The basic premise is incorporating multiple gates into a workable integrating component. Instead of having multiple chips (ie: less insertion on to pcb during manuf, better reliability, smaller package, less power demand, etc..) a specific chip is designed utilizing various gates (transistors) to do a specific job, instead of various chips. Technology… Read more »
David Taylor
Guest
0
David Taylor
October 29, 2009 2:15 pm

It was pretty easy to find out who this was; it was the first company that came up in a quick Google search! It is up over 8% today at the time of this writing.

Tim Sullivan
Guest
0
Tim Sullivan
November 1, 2009 8:46 am

I am not then surprised to find this one watch listed in my tech list. This then is some good feed back. I am also interested in the beaten down RFMD which Raymond James has a “strong buy” on and ASX which is partly owned by Taiwan Semi? ASX basically a we can do better and cheaper of the JDSU businesses? I would appreciate any informed opinoins or observations. Thank You.

wpDiscuz