Could Be Diamonds in the Rough

 | Jul 02, 2012 | 11:00 AM EDT
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The market ended the second quarter on a strong note, having put in an impressive rally Friday. Given that the "risk on" trade appears to be back on (at least for the next 24 hours), here are a couple of speculative $2 tech stocks to consider. Both are currently in the red, but they have solid balance sheets and improving prospects, and they've recently attracted major interest by a hedge fund or private equity firm.

First is Sonus Networks (SONS), which provides voice and multimedia infrastructure solutions, including session border control (SBC), voice over Internet protocol (VoIP) and access and VoIP media gateway products.

Here are four reasons Sonus could provide significant upside from just over $2 a share:

● Empire Capital Management has added some $10 million worth of new shares over the past two months, and it now owns more than 9% of the outstanding shares.

● Sonus has a fortress-like balance sheet, holding more than $300 million in net cash on its books. At the current stock price, that's more than 50% of its market capitalization.

● Consensus earnings estimates for fiscal 2012 and 2013 have ticked up in the last week or so, and the company is projected to be back in the black fiscal 2013.

● The six analysts who cover the stock have price targets ranging from $2.75 to $6 a share, and they expect the company to grow revenues at between 4% and 7% in fiscal 2012 and 2013. The stock was trading north of $8 before the financial crisis.

Bottom line: Sonus seems to be moving in the right direction on the earnings and revenue fronts. Its huge cash balance provides a significant floor on the stock, as well.

Overland Storage (OVRL) provides data management and data protection solutions for primary or nearline storage, disk backup and recovery and data management and protection worldwide.

Here are four reasons Overland could generate outside returns from under $2 a share:

● Marathon Capital Management bought more than $750,000 in new shares over the past 60 days, and it has now accumulated more than 12% of the outstanding float of the company.

● Overland has $10 million in net cash on its balance sheet, some 20% of its present market cap at the stock's current price.

● The company is moving solidly to getting back into the black. Overland lost $0.94 a share in fiscal 2011, but its loss is estimated to improve to $0.71 a share in 2012, and then to only to $0.28 in the red in 2013.

● Analysts expect Overland to start posting significant revenue growth again in fiscal 2013. The consensus projected revenue increase for that year is north of 18%.

Bottom Line: Europe will remain to provide a headwind to Overland in short term, as it gets a good portion of its revenue from the continent. However, the company is in a growing space, it's moving in the right direction and it should reward long-term holders.

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