Powerwave on the Road to Profitability - TheStreet

Editor's Note: This column first appeared in

The Tech Edge

, a proprietary newsletter, on Tuesday, July 15. For more information on

The Tech Edge,

click here

.

Sometimes it can pay to take a look at out-of-favor stocks.

Take

Powerwave

(PWAV)

. The wireless network power amplifier maker sits squarely in a sour spot. Pickled in a rotten wireless infrastructure industry, just off a disappointing earnings report last week and right in the middle of a dilutive convertible debt offering, Powerwave gives Wall Street plenty of reasons to wince.

In fact, after hitting a 52-week high of $9 last week ahead of earnings, Powerwave shares have dropped 14% to $7.70, as second-quarter numbers spoiled the fun.

But what's sour for some investors is merely the beginning of sweetness for others.

The central plot to the bullish Powerwave story revolves around one of our favorite looming trends in the wireless industry: local number portability. And of course, to help hold the financial story together, there is the common accompanying theme of cost savings through outsourcing, as Powerwave shifts its manufacturing work to

Celestica

(CLS) - Get Report

in China.

Come November, when customers are free to switch wireless services with their phone number in tow, telcos will presumably be looking to boost network quality by literally boosting the signal strength from cell towers.

The fact that Powerwave makes these power boosters is encouraging to its fans. And with

AT&T Wireless

( AWE) suddenly a 10% customer last quarter, it appears there may be substance to the claims that some chronically feeble outfits are putting money into performance-enhancing network steroids.

Powerwave said on its earnings call last week that it has its booster gear in some 30 trials, and, probably not coincidentally, the company called for 15% sequential sales growth in the third quarter.

Of course, the company missed second-quarter earnings estimates with a 14-cent loss on lighter-than-expected revenue of $51.5 million. Not included in those losses were the $10 million in charges Powerwave took to cover writedowns and severance payments as it shifts to outsourced manufacturing.

The Santa Ana, Calif., tech shop also turned in anemic 1% gross margins in the latest quarter, but promised to widen that figure to more than 10% as it cuts some 600 higher-paying manufacturing jobs in California and shifts production to China.

The company also gave Wall Street a bit of a fright in stating that it could use the proceeds from its $130 million to $150 million convertible debt offering toward stuff like acquisitions. But few observers feel the company is ready to pull the trigger on a large purchase.

The upshot for tech sharpies is to find a reasonably low price -- like $7, where the stock trades at roughly 1.6 times 2004 sales targets -- and hope that wireless telcos get serious about powering up their networks. If optimists are right about Powerwave's role in the network steroid game, the stock should have some upside.

One investor who is long the stock says he'd be a seller if shares top $10. Hmm. Buy the stock when it's unpopular, then sell it if it gains popularity. That sounds novel.