Needham Fund's Bargains: Seagate, Xyratex

BOSTON (TheStreet) -- For Black Friday bargains, turn to the Needham Small Cap Growth Fund (NESGX).

Chris Retzler, the mutual fund's manager, bets on undervalued small-company stocks. Needham Small Cap Growth has surged 39% in the past year to rank first among its peers.

Retzler has two-thirds of the mutual fund stuffed with computer hardware and software stocks. Almost all of the rest is in cash.

The Needham Small Cap Growth Fund's big winner is Entropic Communications ( ENTR), a maker of semiconductors with embedded software used to deliver high-definition signals. The company's stock, the fund's No. 3 holding, has tripled this year. Retzler's largest position is ATMI ( ATMI), a provider of specialty materials and packaging to the semiconductor industry. Its shares are down 2.3% in 2010.

Among top-10 stocks held by Needham Small Cap Growth that are relatively cheap: data-storage companies Seagate Technology ( STX) and Xyratex ( XRTX). Retzler has pounced on a booming industry.

Still, Seagate Technology, a maker of computer disk drives and storage technologies since 1979, is down 18% this year. As much as 75% of the company's revenue comes from big computer makers such as Hewlett-Packard ( HPQ) and EMC ( EMC).

Seagate has a price-to-trailing-earnings ratio of 4.8 versus the 111 average for its industry sector. Its earnings-per-share growth is 26.3% over the past three years, compared with 18.6% for its peers.

Of the 27 analysts that follow and rate Seagate, there are the equivalent of four "buys," 14 "holds" and two "sells," according to Standard & Poor's.

Xyratex, a developer of network-storage and storage-infrastructure equipment, has a price-to-trailing-earnings ratio of 4.5, versus 21.7 for its industry niche. Its shares are up 17% this year. The market value is $457 million, less than a 10th of Seagate's.

Of the seven analysts that cover Xyratex, there are two "strong buys" and five "buys," according to Standard & Poor's.

The two companies stand to benefit on two fronts. First, there is growing demand for greater storage capacity due to the creation, sharing and aggregation of digital content, data-backup requirements, and the increasing use of storage in consumer-electronic devices.

Second, the data-storage sector is going through a consolidation, with big players such as IBM ( IBM), Hewlett-Packard and EMC buying up smaller firms, burnishing the value of those that remain. Earlier this month, EMC purchased Isilon for $2.25 billion after having been on a buying binge for the past few years.

Standard & Poor's Ratings Services recently placed Seagate's BB+ corporate credit rating on credit watch with negative implications after the hard-disk-drive maker said it may go private. And that could spark share-price appreciation on potential takeover rumors.

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