Our search for stocks under $10 often reveals some familiar but forgotten names, and one that a reader asked us to take a closer look at is CMGI ( CMGI). This supply-chain management company captured investors' imaginations in the late 1990s when it aggressively invested venture capital money in Internet companies, catapulting its market value to around $30 billion. But it's been a long fall from grace for valuations in this space, and the once $163 stock now changes hands at just $2.24.

We aren't adding CMGI to the Stocks Under $10 model portfolio because we want to keep the number of stocks in the portfolio at around 16 -- where it is now -- but we believe investors with discretionary money would do well to research this stock for some hidden value.

CMGI boasts three attributes we like to see in a stock in our universe. It has a legitimate revenue stream that, thanks to a recent acquisition, should cross over the $1 billion plateau during the next 12 months. Analysts are ignoring its recent operating improvements, as not one firm has picked up coverage just yet. And finally, the company's venture capital business, while not as highly touted as it once was, could still produce some solid investment returns with market valuations improving.

The company generates most of its sales these days through its SalesLink segment. SalesLink allows companies to better manage their inventory and supply-chain functions, including order management, warehousing, returns processing and logistics optimization. In addition, SalesLink provides marketing technology and advice that enables corporations to fulfill informational requests for customers and prospects quickly and cheaply in order to maximize profit and customer satisfaction.

Its results for the fiscal first quarter, ended in October, are a strong indication that CMGI is on its way to legitimizing itself as a bubble survivor. The company reported sales of $257 million for the period, up 171% from the prior year. The top-line growth was primarily a function of CMGI's acquisition of privately held supply-chain solutions provider Modus Media, which closed in August. Management said when this deal closed that the addition of Modus would turn the company into a $1 billion annual sales company.

The acquisition of Modus expands the reach of CMGI's supply-chain business to 38 different offices in 13 countries, including China, while broadening its product and service offerings and bolstering the management team. If Modus' results were consolidated for the prior 12-month period, CMGI's sales would have been more than $1 billion in fiscal 2003 and likely would have turned a profit, based on what data we can extrapolate from CMGI's recent quarterly filing. The deal also makes strategic sense, as it helps the company diversify its revenue stream away from Hewlett-Packard ( HPQ), which accounted for 70% of total sales in 2003.

Don't be fooled -- CMGI hasn't pulled the plug on its @ventures venture arm. It has, however, shifted the focus of this segment to clean energy investments. For example, its most recent investment is in H2Gen, a hydrogen generation company, not a dot-com venture with little or no chance of survival. This shift in strategy from investing in highflying tech stocks to branching into other, albeit still speculative, sectors is the idea of new CEO Joseph Lawler. We applaud the company for its improved portfolio breadth. Lawler took over in August from his eight-year tenure at R.R. Donnelley ( RRD) and is known as a hands-on manager, focused on operations and product reliability. He is currently spending a lot of time on the road talking to customers in order to solidify the company's existing -- and potentially new -- relationships.

Should the Modus acquisition pan out and drive annual sales over $1 billion, we believe CMGI could be solidly profitable in fiscal 2005 and attractively priced at just over 1 times 2005 sales. Should the company fall short of its projections, we believe the downside to the stock is limited given its sizable cash position of $188 million. There is no analyst coverage on the company, which leaves the market playing guessing games with the company's earnings potential. The company reported break-even EPS in its fiscal first quarter, ended Oct. 31, which was below the year-ago quarter's 7-cent profit that came on the back of a huge non-operating gain from the sale of Overture stock.

With that in mind, we believe any positive operating comments made by management could serve as a near-term catalyst for the stock price. The company turned in an operating profit of $2.4 million for its fiscal first quarter ended Oct. 31. On a non-GAAP basis that excludes the impact of non-cash charges and restructuring activities, that number would have been $9 million, a 385% year-over-year jump. We expect some synergistic benefits from Modus to improve profitability going forward.

While it's no longer a household name, CMGI still has a $1 billion market cap, a sizable core operating business and will likely turn in an operating profit over the next 12 months. After backing out the cash, the company is valued at $810 million in the market, less than 1 times its $1 billion sales target. We believe the stock will trade closer to its sales level in the coming months, implying 25% upside or a share price of $2.65 a share. Investors who are willing to look beyond the company's historic collapse and focus on the inherent value of the business could take advantage of an attractive opportunity.

P.S. Remember, stocks priced under $10 have the potential to move quickly. So, you might want to get our current recommendations now with a free trial to TheStreet.com Stocks Under $10.
William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to william.gabrielski@thestreet.com.

Interested in more writings from William Gabrielski? Check out Stocks Under $10. For more information, click here.

David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to david.peltier@thestreet.com.

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