I'm not one of those folks who's pounding the table that every single stock is undervalued right now. After all, I firmly believe plenty of stocks deserved the beating they took. However, with the market finally seeming to stabilize -- at least for the moment -- I think timing and valuations are finally starting to work together to create real opportunities within certain groups.

One of my niche picks for the first half of 2009 is the obscure industry of electronics and computer distributors. The P/Es are rock-bottom, yet the forecasts -- even if adjusted for some overly optimistic analysts -- are quite healthy.

Price/earnings ratios aren't my favorite fundamental tools, but check out some of the trailing and projected P/Es for the likes of Tech Data (NASDAQ:TECD), Ingram-Micro (NYSE:IM), and ScanSource (NASDAQ:SCSC).


Trailing P/E Ratio

Estimated EPS for Fiscal 2009

Estimated P/E Ratio for Fiscal 2009

Tech Data




Ingram Micro








Source: Yahoo! Finance. ** Fiscal year ending June 2010.

Not bad at all, which almost makes you wonder if you should trust the numbers. I mean, we are in a recession after all. Shouldn't every company be suffering?

Don't misunderstand -- the global economic contraction hasn't been a friend to computer distributors, either. Sales have been off, and they're largely expected to be off further in 2009. In fact, for the three companies in question, analyst estimates indicate an average revenue decline of about 2% over the next 12 months, and I think that's being generous.

So what gives?
How can companies take fairly significant hits to the top line, operate on thin margins, yet still remain profitable? The nature of being a distributor is considerably different than being a manufacturer. Manufacturers incur research and development expenses and create inventory that they may or may not be able to sell.

For instance, Micron (NYSE:MU) and its competitors make for a good example of too-much-inventory-itis. Demand for computer memory has been decent, but excess supply (across the board) has forced price cuts, and Micron is still sitting on a ton of inventory.

Distributors, on the other hand, have no development expenses and try to minimize inventories. The trade-off is a sky-high cost of goods sold, but it's a formula that works for most distributors. They don't have to buy more inventory than they can sell, which means they effectively never have to sell it for less than it cost.

I'd be the first to say that a tech distributor may not be the sexiest way to start 2009. But it sure beats a lot of alternatives.

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