In Time for Next Tech Rally

Global maverick Robert Hsu can always be counted on to bring the excitement of international investing to Money Show attendees. And one of his recent recommendations has all the earmarks of another potential winner...

"Over the past 10 years, the fourth quarter has been the best time to own Asian technology stocks, and I expect this year to be true to form as new products bolster demand that is already stronger than usual because of holiday shopping.

"I am recommending Diodes (DIOD NASDAQ), an exciting tech play. Before Keh-Shew Lu, a 25-year Texas Instruments veteran, became CEO last year, Diodes was a leader in "discrete" devices--low-cost, small, single-use chips that go into computers, cell phones, digital cameras, flat-panel displays, and other consumer products. Last year Lu pushed Diodes into new markets, more in the direction of analog chips, which command a higher average selling price than digital chips and sport a better growth margin.

"Its unique niche is standard to low-end, commodity-like analog chips, which are a lot cheaper to produce and can be assembled faster and cheaper. With two chip assembly plants in China, Diodes benefits from China's low-cost, large-scale production capabilities.

"Diodes can use the same materials to assemble and package both its analog and discrete chips, which are still a significant part of the business, resulting in lower costs than many of its rivals.

"Diodes serves over 150 customers worldwide, including Honeywell, LG, Logitech, Motorola, Quanta Computer, Samsung, and Hon Hai Precision Industry, the parent company of one of our other holdings, Foxconn (FXCNF).

"Diodes reported strong growth in its latest fiscal year. China and Taiwan comprise the bulk of net sales, contributing 32% and 28%, respectively, followed by the U.S. at 25% and Europe, where it is actively looking to expand, at 3%-4%. Over the past three quarters, earnings have risen from 10% to 41%, while sales grew from 8% to 63% in the past four quarters. I'm expecting earnings to grow an impressive 40% in 2006, 24% higher than in 2005.

"Diodes recently raised its third-quarter revenue guidance about 12%. Given all of this good news, DIOD has doubled in the last year. It has a trailing P/E ratio of 30. However, when you factor in projected earnings growth, its forward P/E ratio is an attractive 18.

"The stock reached a 52-week high in mid-September on increased revenue guidance before pulling back on profit-taking. I believe it is consolidating at current levels before making its next run in this seasonally strong fourth quarter.

"Buy DIOD under $45. I'm targeting 35% gains in a three-month timeframe."