Value Investing in a New Portfolio Demands Patience

NEW YORK (TheStreet) -- Nearly two months ago, I rolled out the Small Tech BITES May Make for Tasty Investment, a group of small, seemingly cheap technology names that received little respect from the market.

Part of the reason for designing this tracking portfolio was to get a sense of whether small tech names are truly cheap, or whether they just appear to be. Sometimes companies appear to be bargains but really aren't. All of the names in this portfolio had the following attributes in common:
  • Minimum Market Cap of $250 million
  • Trading for less than two times net current asset value
  • Profitable during trailing 12 months
  • Forward Price earnings ratio is less than current PE
  • Long-Term Debt to Equity is less than 30%
  • All are technology related names

While two months is but a day to a value investor, it's time to do a brief review of the portfolio, which is comprised of the following names: Benchmark Electronics (BHE), Ingram Micro (IM), Tech Data (TECD), Electro Scientific Industries (ESIO) and SYNNEX (SNX). Since I wrote that initial BITES column, the portfolio is down 2.5%, while the Russell 2000 is up 2.9%, and S&P Small Cap Index is up 3.5%. That's certainly nothing to write home about. Two of the names Benchmark (+5.8%) and Tech Data (+4.8%) are in positive territory, while Synnex (-10%), Ingram (-7.8%) and Electro Scientific (-5.3%) have all been negative. BHE Chart BHE data by YCharts
SNX Chart SNX data by YCharts

Of course, the portfolio still appears to be exceedingly cheap, and the metrics are very similar to what they were in March. Weighting all five of the names equally, the portfolio trades at just 1.37 times net current asset value, 0.96 times book value, 0.44 times price to sales, and a forward price earnings ratio just over 10. The average market cap is about $1.46 billion. The companies are also remain cash rich, with each having at least 17% of their current market cap in cash, or an average of $338 million per company.

As a value investor, I often fish in ponds that are overlooked, or out of favor with others, and this group of small technology names certainly fits that mold. I don't expect quick results here; in fact I never do, and am usually surprised when names I buy take off quickly. When that happens, it usually demonstrates luck and not skill, not that I would complain in those situations.

Its' still too early to tell whether these companies represent real bargains, or whether valuations have shifted to the point that the market is deeply discounting them. They certainly look cheap, and smell cheap, but it may take quite a while to know for sure.

Welcome to the wonderful world of value investing, where only the most patient among us need apply.

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

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.

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