Small Tech BITES May Make for Tasty Investment

NEW YORK (TheStreet) -- Years ago, I paid little attention to technology-related companies, primarily due to valuation. Over the past several years, that has changed, and my deep-value-related screens have been revealing loads of seemingly cheap and small tech-related names. Some of these have been trading at such relatively low multiples of nearly everything since 2008 to 2009 that you've got to wonder if that is just the "new norm." The truth is I'm not sure at this point. But I aim to find out.

To that end, I've developed a small tracking portfolio of some of these names, all of which meet the following criteria:

• Minimum Market Cap of $250 million
• Trading for less than two times net current asset value
• Profitable during trailing 12 months
• Forward price-to-earnings ratio is less than current P/E
• Long-Term debt-to-equity is less than 30%
• All are technology-related names

With that, I am pleased to introduce the BITES portfolio, comprised of the following names: Benchmark Electronics (BHE), Ingram Micro (IM), Tech Data (TECD), Electro Scientific Industries (ESIO) and SYNNEX (SNX). This highly concentrated portfolio is for tracking purposes only, but should be interesting to follow. Ultimately it might help answer the question of whether small tech names are really cheap or whether they just appear to be.

In terms of fundamentals, most everything about this portfolio screams "cheap." Weighting all names equally, the portfolio trades at just 1.37 times net current asset value, .97 times book value and .43 times price to sales. While the current P/E is on the high side at about 32, it is skewed by Electro Scientific's current 100 PE ratio; the forward PE ratio however is just 10.

The five stocks have an average market cap of about $1.5 billion, which is somewhat skewed by Ingram Micro's $3 billion market cap. Ingram, just like most of the BITES names, is a former net/net that has been showing some signs of life lately. Yet it has been having trouble breaking out above the $21-to-$22 area, and has not traded above that level since 1999. Ingram's IT products distribution business generates a lot of revenue -- nearly $38 billion in 2012- but very low net margins. The company closed on its $650 million acquisition of higher margin Brightpoint (former ticker CELL) in October; this should help improve margins somewhat, but we'll see. IM data by YCharts

The smallest BITES name is laser-based manufacturing solutions company Electro Scientific Industries. Certainly not a household name, the company garnered a little press late in 2012 when it joined the "special dividend club," paying shareholders, including yours truly, a special $2 per share cash dividend, ahead of all the uncertainty of tax law changes for 2013. After paying out nearly $60 million for that special dividend, the company still has $143 million, or $4.84 per share in cash and short-term investments on its balance sheet.

ESIO data by YCharts

I'll be updating the progress on this portfolio of technology misfits over the coming year.

At the time of publication, the author was long IM, ESIO.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.