The Rodney Dangerfield of Techs

Perhaps our high expectations stem from the stock's 54% climb since it popped up in our August 2004 insider buying search. (The S&P is up 15% over the same span.) Or perhaps we're wondering why the stock, which climbed past $25 in September, has since dropped below $20. Is Netgear's run over? We'll look into that in a moment; the stock's recent weakness earned it a spot on our Contrarian screen.

Contrarian investors seek out the stocks others are discarding, in hopes of finding one or two that have gotten unduly cheap. In other words, they defy the collective wisdom of the financial markets. Sound scary? It is, unless you know something contrarians have figured out: The market isn't all that wise. Remember Pets.com? (Hint: sock puppet, expensive Super Bowl ads.) In 2000, traders valued the stock as highly as $14 a share and as low as 19 cents apiece. Ultimately, the price went down to nothing, by which point the bulls had moved on to the next big thing.

The market's no better at bargain hunting. If Wall Street, in its collective wisdom, knew that Netgear would be a near-$20 stock today, it shouldn't have fetched as little as $12 a share within the past year. The point is, investors needn't feel bad about bucking the market, so long as they have good reason to believe the market's wrong.

That's where our Contrarian screen comes in. It scours the bottom 10% of our 8,000-company database in terms of share price performance over the past 13 weeks. And it further focuses on unpopular stocks saddled with average analyst recommendations of Hold or worse.

At the same time, it seeks price/earnings-to-growth, or PEG, ratios below 1.0. The PEG divides a stock's price/earnings ratio by the projected long-term earnings growth rate. In other words, the formula identifies companies whose share price may not fully reflect their growth prospects. In this screen, the PEG helps turn up cases where analysts' words — Buy, Hold and so on — don't match up with their numbers.

Use our stock screener and Contrarian recipe anytime to run the search for yourself. Recently it produced a list of 10 survivors. Let's look at Netgear.

Based in Santa Clara, Calif., Netgear makes networking products for homes (routers, print servers, Internet phone adapters) and small- to medium-size businesses (stackable data switches, firewall routers, boosters). It sells its products through business distributors and retailers like Best Buy (BBY), Staples (SPLS) and Amazon.com (AMZN). Trailing 12-month sales for the company total $433 million, up from $404 million at the time of our May story.

The term "networking" can refer to businesses setting up enterprise servers and systems, or to home users trading up their dial-up Internet connections for broadband and wireless ones. Those who've used high-speed connections at work and home for years may view those markets as somewhat tapped. Not so, says market-research firm International Data Corp. While virtually all the companies with more than 500 employees have high-speed data networks, just a third of small and medium-size companies with between 11 and 250 employees have them, according to IDC. Among households, defined as locations with fewer than 11 people, just 13% are networked.

Netgear has benefited in recent years from the rollout by cable providers of bundled cable, phone and broadband data services, as well as from the spread of Internet phones and Wi-Fi Internet connections. If the company's sales top $527 million next year, as projected, they'll have doubled in three years.

The stock's recent weakness may stem partly from the third-quarter results, reported by Netgear on Oct. 26. Wall Street viewed the numbers as somewhat soft, but was more pleased with fourth-quarter guidance. Sales in the third quarter increased just 10% year-over-year to $111.3 million, about $6 million shy of analysts' consensus estimate. Product shortages and shipping delays took the blame. Still, adjusted earnings jumped 44% to $9.1 million, and earnings per share of 27 cents met estimates. Management said the company would earn $124 million to $130 million in the fourth quarter. The Street was looking for $123 million.

"Following recent meetings with management, we continue to believe Netgear is seeing solid trends in its seasonally strong December quarter," wrote Lehman Brothers analyst Jiong Shao in a Nov. 21 research note on the company. "Looking ahead, management highlighted that the [home and small-business] networking market is expected to expand 15% in 2006 to $7.5 billion from $6.5 billion and Netgear expects to grow ahead of that with share gains, while also continuing to expand its annual operating margins." (Shao doesn't own shares of Netgear; Lehman brothers has an investment-banking relationship with the company.)

Analysts, on average, project that Netgear will boost its earnings per share by 27% annually over the next five years. At its current price the stock carries a 2005 price/earnings ratio of 18. Divide one by the other and you get a PEG of just 0.7, or half the average PEG for communications-equipment makers. That may have something to do with the recently disappointed expectations. But the numbers on the stock suggest contrarian investors should be scooping it up.