Daily Gains Letter

Why This Beaten-Down Stock Is Worth a Closer Look

By for Daily Gains Letter |

This Beaten-Down Stock Deserves a Closer LookSmall-cap stocks made a sweet rebound in June after the Russell 2000 previously declined below both its 50-day and 200-day moving averages. The index actually had been down 10% earlier in the year, prior to staging a nice rally, based on my technical analysis.

While the risk with the higher-beta growth and technology stocks continues to be higher than the S&P 500, the weakness has provided a decent trading investment opportunity for the more aggressive speculators looking for above-average risk-to-reward trades.

In my view, there is no better area as an investment opportunity for speculative trades than technology due to the immense upside; but at the same time, the associated risk is also higher due to the downside.

If you are searching for a beaten-down small-cap technology investment opportunity that could return some quick money, take a look at a stock like Extreme Networks, Inc. (NASDAQ/EXTR), which currently sits at a stock price around $4.27 and a market cap of $412 million. The stock traded as high as $8.14 in January, but it has lost nearly half of its value since then, so I see an investment opportunity here.

Extreme Networks Inc Chart

Chart courtesy of www.StockCharts.com

Some see Extreme Networks as a stay-away stock, but I view it as a contrarian investment opportunity at a time when the stock has been beaten up and tossed around by the stock market. Now, I’m not saying it’s easy money, but I like the trade risk to reward here; there’s more upside potential than downside risk, which makes it a good investment opportunity.

Extreme Networks develops network infrastructure equipment and services that cater to enterprises, data centers, and service providers. Its clients include businesses, hospitals, schools, hotels, telecommunications bodies, and governments. What I like is the company’s development of network solutions that factor in the shift to mobility.

The company has some core clients. Its top four clients, which account for at least 10% of the company’s revenue, include Westcon Group, Inc.; ScanSource, Inc. (NASDAQ/SCSC); Ericsson (NASDAQ/ERIC); and Tech Data Corporation (NASDAQ/TECD).

Extreme Networks is a global company with more than 60% of its revenue coming from outside of the United States in such places as Europe, Asia, Canada, Mexico, Central America, and South America.

For the stock to be a good investment opportunity, it needs to convince investors that it can strengthen its growth. Revenues declined for two straight years, but are expected to rise 71.4% to $513.98 million in FY14, and 21.0% to $622.13 million in FY15, according to Thomson Financial. The stock would be a good investment opportunity if these numbers pan out.

The company is also starting to see some earnings growth, with estimated earnings of $0.25 per diluted share in FY14, and $0.39 per diluted share in FY15, according to Thomson Financial.

Valuation-wise, the stock trades at an attractive 10.95 times (X) its estimated FY15 earnings and has a price-to-earnings growth (PEG) ratio of 1.18 based on an estimated five-year compound annual growth rate of 15.0%.

In my view, the stock could surge if it delivers or shows evidence that the worst is over for this stock.

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