Power-One, Inc. (PWER)

You know how hard it is to take your eyes off an impending disaster. You can’t help but at least peek as that car slams into the other, or the guy in the movie throws himself off the building. Gruesome, but fascinating, that’s how I feel about this stock sometimes.
The prospects of the future captivate you, as the reality of the car wreck that current financial numbers represent pins you to your seat. You want to run but somehow hold back, hoping the car will swerve at the last moment. I think it will.
Let me break my argument down into three segments…. Only in reverse order
The Good, The Bad, and The Ugly
The Ugly- Where do I start? Current PE is 208. Return on Assets, operating margins,
quarterly earnings growth, and cash flow, are all in the negative.
The Bad- The industry lag in adopting the inevitable application of this companies power
management and production techniques is literally killing it. The proprietary solutions they provide at the chip level management of power (analog versus digital) are so stunning and revolutionary, that they actually have created an adaptation log-jam. It will require the companies that would utilize and benefit from PWER products to completely rethink and re-engineer the way they currently do business in regards to power architecture. On top of this comes the recent acquisition of Magnetek. Although a fine fit
in the companies over-all plans, the effort of integrating such a large acquisition into the companies corporate structure and strategies, coupled with the body blow to the balance sheet, has hobbled PWER in the near term.
The Good- This is what keeps me looking at the impending wreck, and thinking that it may just be a close call.
1.)   The inevitability of this company’s unique technology is without question. The move to smaller denser chips will require the power supply answers that PWER provides.
2.)   The hidden jewel in this tarnished kings crown lies in the deep patent moat surrounding the company. Its processes and solutions are protected by well documented and primary patents that will keep any competitors at bay for quite some time.
3.)   The use of PWER products and processes actually saves money(electricity), and upon wide spread adoption will simplify the architecture and production of future
chip structures.
4.)   The eventual integration of Magnetek will provide a seamless line of power
solutions from the micro to kilowatt level, offering other companies a one stop vendor for all their needs.
5.)   The current large short position represents (to me) a group of well fed party goers
that may have stayed too long at the party. They have made good money and may be ready to jump ship at the first signs of a strengthening company.

Summary- This is a gut call for me. The numbers today do not justify a higher price.
But you do have to remember one of the caveats of investing. “One must not expect exceptional returns without taking exceptional risks.” I do think that as a company that traded as high as 100 just a few years ago, it has the potential for a ten-bagger return
if all the stars align. I would suggest that anyone interested in the company start their research with this recent article in Forbes: http://us.rd.yahoo.com/finance/external/forbes/SIG=12uoqgp5b/*http://www.forbes.com/2006/12/06/powerone-cisco-google-pf-soapbox-in_cb_1206soapbox_inl.html?partner=yahootix

An astute investor once noted that the key to his success was to look forward to see what direction growth was traveling, and then to go get out in front of it. I just hope by investing in this stock, I don’t get run over.
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