Editor's note: This Stocks Under $10 alert was originally sent to subscribers April 16 at 2:30 p.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.


When scanning the market for low-priced stocks that can become winners for aggressive investors, it's not difficult to find a number of relatively big tech names that used to be highfliers back in the bubble days.

Sanmina-SCI ( SANM) is a good example of an under $10 stock that has a large footprint. With more than 40,000 employees helping to generate almost $11 billion in sales last year, it's somewhat surprising that investors can pick up shares of Sanmina at the bargain-basement price of $3.70.

There are always a number of reasons why a stock trades in the under $10 area, and Sanmina has its share of problems. These issues range from a weak environment for sales growth to a large debt load.

Nevertheless, we have to dig a lot deeper to decide whether the negatives are already priced into the stock, enabling us to potentially make big profits as the company turns itself around.

Given the significant risks associated with many companies in the under $10 space, we need to find stocks that can offer significant returns to compensate for the added risk.

Does Sanmina offer that kind of potential upside? Let's take a closer look.

Sanmina generates its revenue by offering manufacturing and related services to OEMs, or original equipment manufacturers, across a number of industries, including communications, computing and storage, multimedia, consumer-related, industrial, semiconductor and defense/aerospace.

The company is typically referred to as an EMS, or electronics manufacturing services, provider. Sanmina's services span the entire product cycle, from design and engineering through assembly and post-manufacturing needs like shipping and repair services.

Its primary customers range from major players in the computing industry like IBM ( IBM), Lenovo and Hewlett-Packard ( HPQ) to large and small companies in the communications and IT industries, such as Nokia ( NOK) and Alcatel-Lucent ( ALU).

Sanmina's business model has a number of attractive characteristics. For one, it can service customers looking for help in the initial stages of product development, providing the early design and engineering schematics needed before a product goes into production.

This business feeds into Sanmina's traditional manufacturing business, where it mass produces a wide array of electronics products, from printed circuit boards to more complex computer components like disk enclosures.

The company has also been moving its EMS capabilities into nontraditional industries like defense, automotive and medical, where there is more room for growth in market share.

However, Sanmina also has its share of problems. In recent years, the company has been losing market share in its core computing and communications end markets, which represent about 70% of total revenue.

Although analyst sources giving Sanmina's market share in the traditional EMS market vary, a number show a consistently declining share to percentages in the high teens in 2007 from levels above 23% in 2000. This negative trend has yet to show any sign of reversing in the near future.

Management has attempted to offset these declines by focusing on driving growth in other areas, specifically its original design manufacturing, or ODM, business. However, Sanmina's three-year effort to establish this unit came to a halt last fall when the company announced it would exit the business, stating it is a manufacturing company, not a product company.

While these execution issues continue to plague the company, Sanmina also finds itself with a weak balance sheet. Total debt of more than $2 billion included $1.58 billion in long-term debt as reported in Sanmina's most recent quarterly results.

By itself this debt would not be a major issue, but Sanmina's cash flow from operations has been unimpressive to say the least. Results for 2006 show cash flow from operating activities of negative $334 million, which when combined with investing and financing activities totals negative $576 million in cash flow.

Although we don't believe this large debt and recent poor operating performance place the company in serious financial danger, it does limit Sanmina's ability to invest in significant expansion or growth-oriented initiatives, especially relative to major competitors like Flextronics ( FLEX) and Solectron ( SLR), which are in much better financial condition.

The numerous issues facing Sanmina, however, do not rule out the possibility that investors could make a nice profit on the shares. In fact, the Stocks Under $10 model portfolio includes a number of companies with spotty pasts that are in the midst of a turnaround -- the type of play that we call an "Inflection Point" stock.

But when considering a company that fits this category, we look at the long-term picture to see if management has a sensible plan for recapturing growth in margins, achieving profitability, gaining market share or improving other major metrics that could be a catalyst for the stock.

In the case of Sanmina, management has a history of attempts at righting the ship, only to end up turning away from its core competencies or making questionable acquisitions that end up hurting the company more than helping.

Looking at the stock's valuation, shares of Sanmina were recently trading just below 14 times 2007 consensus estimates, which we view as relatively inexpensive at first glance.

However, analyst consensus expectations are predicting a less-than-1% increase in revenue this year, and it's difficult to pin down exactly when Sanmina might see a consistent rate (at least 10%) of sales growth in the future vs. analysts' projections of just 0.8% growth in 2007 and 6.6% in 2008. In addition, the company has yet to show that it can stop the market-share losses in its core operations.

Another factor that leads us to believe that Sanmina is a poor candidate for the Stocks Under $10 model portfolio is the simple fact that the potential upside isn't large enough to warrant a purchase.

Sanmina is highly leveraged to overall tech spending, meaning that shares will benefit if a lot of companies boost their capital expenditures, which generally occurs when the economy becomes strong. But at the present, the U.S. economy is in the midst of a slowdown.

So in this case, there are better opportunities than Sanmina -- especially looking around the rest of the under $10 arena -- that should provide nice gains in 2007. We prefer to focus on unique situations with a more company-specific thesis that could offer greater potential upside.

In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Kusick is a research associate at TheStreet.com, where he works closely with Jim Cramer and works on TheStreet.com Stocks Under $10. Prior to joining TheStreet.com, he worked in options trading and management consulting. He appreciates your feedback; click here to send him an email.

Interested in more writings from Larsen Kusick? Check out Stocks Under $10.

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