NEW YORK (CNN/Money) -
The key to successful investing in the technology sector is not just finding strong companies with earnings momentum. It's also being able to spot struggling companies that have been drastically oversold.
Take Gateway (GTW: Research, Estimates), the computer company with the funky cow patterns on its boxes. Is it a mess? Yes. Sales are expected to fall 3.8 percent this year and the company is on track to post its third consecutive year of losses.
And even though it is still the third largest manufacturer of PCs in the U.S., it is lagging well behind Dell (DELL: Research, Estimates) and Hewlett-Packard (HPQ: Research, Estimates) and continues to lose ground.
The stock now trades for just $2.24 a share, more than 96 percent below where it traded three years ago. So Gateway has been milked dry, right? Stick a fork in this stock. It's done.
Not so fast. To be sure, Gateway is not a growth company anymore, and it seems safe to say that it will never again approach its lofty levels of 2000. But that doesn't mean that there isn't money to be made in the stock.
Cash in the bank
Gateway's market value is just $726 million even though the company is still expected to generate $4 billion in sales this year. Trading at less than one times sales is one sign of a bargain, and Gateway is trading at less than a fifth of sales.
The company's cash in the bank alone is worth more than the stock price, at $1.1 billion or $3.30 a share.
The company has $195 million in potentially dilutive preferred stock, but even subtracting that leaves $2.70 in net cash per share.
Of course, some busted companies can trade for less than cash all the way into bankruptcy. But Gateway seems to have more hope than that.
The company seems to finally realize that it has to do a better job of cutting costs in order to reduce its losses (and ultimately return to profitability). Gateway CFO Rod Sherwood said at a Morgan Stanley tech conference on Wednesday that the company hopes to reduce selling general and administrative expenses (SG&A) by more than $50 million as well as reducing cost of goods sold by $200 million.
To get there, Sherwood said the company will probably take a restructuring charge of at least $80 million this quarter. Sherwood said that Gateway should still finish the year with more than $1 billion in cash.
Store closings likely
Although the company did not give any more specifics on how it will cut costs, the hope is that Gateway will shut down some of its 270 Gateway stores -- the biggest contributor to overall losses.
"Part of their strategy has to involve closure of some of those stores," said Robert Cihra, an analyst with Fulcrum Global Partners, a firm that does no investment banking. Cihra does not own the stock.
Cihra said he'd like to see more details from the company before recommending the stock. But he notes that he sees little downside from these levels. If Gateway does decide to close some stores and emulate the Dell model of selling PCs over the phone and Web, then the company can avoid burning through its cash, he said.
And Walter Winnitzki, an analyst with First Albany, thinks the stock will get a boost once the cost-cutting plan is more fully outlined. Winnitzki does not own the stock and First Albany has no investment banking relationship with the company.
"This is a step in the right direction," Winnitzki said. "Gateway is finally starting to get serious about an issue that Wall Street was disappointed about."
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Now don't get me wrong. I'm not saying this stock is going to go from $2 to $10 any time soon. Gateway still has huge challenges ahead of it. Despite claims from Sherwood that it will return to profitability in the fourth quarter and be cash flow positive, analysts still are expecting Gateway to lose money in 2003 and 2004. Heck, I'm still surprised that Gateway is even in the S&P 500 -- although there are 10 companies in the index with an even smaller market cap.
But the stock has been unfairly branded (sorry, I couldn't resist) as a company on its last legs. Investors should take it slow, but there are some potential gains here.