RealMoney Silver - A Chip Tester That Value Investors Would Love

A Chip Tester That Value Investors Would Love
By John Reese
RealMoney.com Contributor
3/24/2008 12:58 PM EDT

The market selloff has brought the value-focused strategy of David Dreman to the fore. Dreman is arguably Wall Street's best known contrarian investor.

Using Freman's preferred parameters in my computer model, I came across Siliconware Precision Industries (SPIL) . Based in Taiwan, Siliconware is the third largest of the four major semiconductor assembly and testing outsourcing firms. These are the companies that assemble and test chips in the production process, and prepare semiconductors for commercial use. Morningstar notes that the company is one the best-managed companies in its sector.

The Dreman strategy runs four tests of a stock regarding its contrarian qualifications; passing at least two of these tests marks the stock as contrarian. Siliconware's stock passes two tests, including having a P/E ratio (8.62) in the bottom 20% of the overall market, and having a price-to-dividend ratio (14.71) also in the bottom 20% of the market.

SPIL also meets a range of other criteria that Dreman seeks:

The company's earnings have increased during the past two quarters.
Earnings-per-share growth rate has exceeded that of the S&P 500.
Return on equity, at 27%, is among the top one-third of the 1,500 largest-capitalization stocks.
Pretax profit margins are a very impressive 30%.

All of these factors makes the Dreman strategy a strong believer in Siliconware as a worthwhile investment.

I also like to follow the investing tenets used by John Neff, another famous contrarian investor. Neff, as is the case with Dreman, likes the stock's low P/E ratio and high (20%) projected EPS growth rate. SPIL also sports an impressive total return-to-P/E ratio (EPS growth plus yield, divided by the P/E ratio) of 16.62, far above the industry average of 2.0.

Siliconware is a well-regarded player in an important segment of the semiconductor industry. It is well run and its stock is well priced. Given the current market conditions, these are very good reasons to invest in Siliconware.

At the time of publication, Reese had no position in the stocks mentioned, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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