A Value Play in Tech

NEW YORK ( TheStreet) -- I've made the trek to the Value Investing Congress West for the past seven years, and consider it a must-attend event. The conference was in Las Vegas earlier this week, and as usual, I walked away with some interesting ideas.

David Nierenberg of D3 funds is a frequent Congress speaker, and I've learned a great deal from him over the years. Nierenberg takes concentrated positions, typically in small "busted" growth companies, where he sees potential value. He often takes the role of "friendly activist" when necessary, helping companies to right their ship.

Nierenberg has shown me that technology and deep value can go hand in hand. That idea has given me a wider set of opportunities.

This year he made the case for technology-based language learning company Rosetta Stone ( RST), a recognizable name to many and the global leader in its category, Still, some investors may not realize that it's a publicly traded company. (Nierenberg's company D3 owns 8.1% of Rosetta.)

After Rosetta went public in 2009 at $18 and rose to above $30, shares fell to below $7 in January 2012, as international sales and marketing spending became bloated, and it became clear that the company's use of kiosks to sell its product didn't provide a high enough return on investment.

The following month, the company named a new CEO who has cut ineffective marketing costs, closed all U.S. kiosks, moved the company toward online subscriptions/downloads, and focused on i-Pad and mobile device applications.

Shares have more than doubled since early 2012 to over $16. That rise includes Thursday's 9.5% haircut after the company reported lower-than expected first-quarter revenue. RST Chart RST data by YCharts

Yet, there's still plenty to be interested in for value investors. The balance sheet is solid: the company ended the first quarter with $139.3 million, or $6.34 per share, in cash and with no debt.

Rosetta's pile of cash puts its enterprise value at just over $200 million, very small for a company with Rosetta's brand recognition. The company appears to be at the forefront of education technology with considerable research and development spending.

On Thursday, Rosetta reported a first-quarter loss of 3 cents per share, better than the 8 cent expected loss, but revenue of $63.9 million lagged analysts' estimate of $64.5 million.

Shares had been on quite a run since early March, up 56% before Thursday's earnings announcement, and so perhaps some profit-taking was in order.

Perhaps the universal shelf registration Rosetta filed Thursday also contributed to the stock's drop. The shelf registration allows the sale of 8.4 million shares held by the company's two largest insider shareholders, and also allows the company to issue debt or preferred stock.

Still, at a time when value is getting tougher to find, Rosetta Stone is on my radar.

At the time of publication the author held no positions in any of the stocks mentioned.

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.