Napster: Somebody out there likes them

That somebody happens to be Bear Sterns analyst Kunal Madhukar.  Thanks to Madhukar, his upgrade last week sent shares of Napster Inc. (NASDAQ:NAPS) up 15%.  With today's pullback, shares of NAPS are only up 6.5% since his upgrade to "Outperform" from "Underperform."  Most of you know the Masters have talked up Napster in the past, but now Wall Street is onboard.

On Feb 11th, Bear Stearns analyst Kunal Madhukar wrote that Napster's disinterest, coupled with a trading imbalance that resulted from the company leaving the S&P 600 Small Cap Index in February, "has resulted in a compelling buying opportunity for investors who are willing to hold the shares for 12 (to) 18 months."

In the past year, the stock has traded between $1.60 and $4.46.

Madhukar, who has a $2.50 price target on Napster shares, noted Napster finished its third quarter in December with $69 million in cash and equivalents. Based on its 43.6 million outstanding shares - an additional 2.4 million are marked as restricted share awards for employees and will likely vest in the next few years - the company's market value is $71 million, and enterprise value is about $2 million, Madhukar said.

"At current valuations, in our view, investors are effectively buying the cash at face value, and getting the company for free," he said.

Madhukar wrote that the market is "more than discounting" risks to Napster's business, but that the company isn't getting credit for its brand, technology, portal, partnerships or for cash and tax-related net operating losses.

Fellow Masters, this is a long-term hold, but any other good news and you could bank 5 to 10% in a single day.  Above all, NAPS is a stock to add to your watch list.