We all know what speculative means when it comes to investing. More often than not, we’re putting money into a stock that could just as well plummet in value as offer triple-digit returns. So we do the research necessary to decide if the reward outweighs the risk, and to make sure we’re buying more than just a hope-and-a-prayer lottery ticket.
Well, a couple of quick picks probably had a better chance of making you money than shares of Cadence Design Systems, if you looked at the company’s 2008 performance. The exhaustive list of what went wrong would have been enough to scare off even the most daring of stock speculators. Investors would have seen tons of risk and virtually no chance for reward.
Cadence is an electronic design automation company. Basically it makes the equipment necessary for semiconductor companies to make their chips. Usually, EDA, as it’s called, is a good business, especially now. Consumers demand smaller, faster gadgets and the semi firms work hard to keep pace. That keeps Cadence’s factory’s buzzing, too. Also, companies tend to renew contracts with their EDA client of choice 99.9% of the time. So Cadence rarely has to worry about losing clients.
What about the bad stuff? Here’s one point: This is a $5 stock, and share prices don’t drop that low for no reason. Cadence fell from about $17 in early 2008 to $3.66 by year’s end. In between, the company’s 30.5% 2007 operating margins dropped to –3%, management was fired, the Nasdaq threatened a delisting for failure to file a 10-Q for the September quarter, and an accounting probe caused a delay in SEC filings. Worst of all, Cadence changed some of its own accounting procedures, and that made revenues look lower than they actually were. Wall Street responded in kind.
The next logical question then is, why on earth would anyone want to buy this stock? Well, because Cramer sees the beginnings of a turn. Cadence beat Street earnings estimates when it reported on April 29. And while the company is still losing money, execution improvements seem to indicate that next quarter’s revenue and operating margins will be up. Also, revenue reporting will have caught up with those new accounting procedures by then as well. And Cadence will receive a $150 million operating expense benefit this year, and a 12% workforce reduction should help with overhead. Lastly, Wall Street’s expectations are still low, too, so there’s the chance for another earnings beat next time around.
Cramer found some downside protection here as well. Cadence holds $2.20 of cash and equivalents per share, so the stock price shouldn’t drop much more $3, and that’s in a worst-case scenario. And the chairman/CEO and chief financial officer have been buying their own stock.
So Cadence is Cramer’s latest tech spec, and he thinks there’s the chance for great upside here. Sure, he could recommend Google , Apple , Amazon and Research in Motion – all great stocks – but there might even be better returns in store for smaller, lesser-known names like CDNS.
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