Don't Be Fooled By ADRs Bearing Compelling Fundamentals

By Aryeh Katz | September 17, 2010 AAA

Most money managers agree that exposure to foreign equities can help to both reduce a portfolio's volatility and add to its gains over the long term. Those same managers will likely also tell you to focus on companies with strong fundamentals - low price/earnings (P/E) ratios, strong dividend yields - that are trading at or below book value.

But what to do when all the parameters are there and the stocks are still duds? What if there's negative performance? It can happen. In a declining market, or in particular stocks that have lost the confidence of investors, all the fundamentals can line up perfectly and look very attractive. For awhile, that is, until the next earnings report is released or the company's dividend is eventually slashed, and the stock finally crashes.

Here are three such stocks - foreign companies with better-than-average fundamentals that may prove anything but a value investor's dream.

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Semiconductor Price Spill

Over the last year, shares of Taiwan-based Silicon Precision Industries (Nasdaq: SPIL) have lost 31% of their value. The maker of semiconductor packaging and testing services fared a whole lot worse than the rest of its market niche, as represented by the Semiconductor HOLDRs ETF (NYSE: SMH), which is flat over the same period.

All the same, the company's shares offer investors a rich 8.3% dividend and trade hands with a P/E ratio of 9.84. Price-to-book (P/B) ratio on the shares is a passable 1.7. But would you buy the stock? On fundamentals, yes, in a heartbeat. On recent performance? Unlikely.

Dividend Fails Telecom

So, too, with shares in Magyar Telecom (NYSE: MTA). The Hungarian national phone company also has some compelling fundamentals, a 10.2% annual yield and a P/E of 10. P/B ratio is just 1.4 for the stock, but over the last year MTA shares are down 27%. That's a whole lot worse than the global telecom sector, as represented by the iShares S&P Global Telecom ETF (NYSE: IXP), which turned in a 3% gain over the same period.

Himax Technologies (Nasdaq: HIMX) is another Taiwan-based semiconductor outfit with a dismal performance record and dreamy fundamentals. The company's stock offers an annual 10% dividend and trades with a P/E of 11 and a P/B of 2. That said, the shares fell nearly 28% since last September.

The Wrap

There's much to be gained by focusing on fundamentals. But know, too, that those same fundamentals - for a time - can mask a company that's lost its competitive edge. (To learn more, see our ADR Basics Tutorial.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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