Still plenty of upside – in China
U. S. indexes may be at record highs, but Brad Radin, chief investment officer at Radin Capital Partners, is finding plenty of stocks elsewhere in the world that he thinks still have lots of upside.
On average, holdings in the IA Clarington Global Opportunities Fund need to climb 70% to reach their record highs.
Mr. Radin, who also manages the Radin Global Opportunities Fund, a long-short fund with many of the same long positions as the IA Clarington portfolio, is finding many of those opportunities in Hong Kong and China. These positions make up roughly 25% of the fund.
“China- related stocks offer more than twice the growth of stocks elsewhere in the world at half the price,” the portfolio manager said.
He noted that the average price-earnings multiple in China is roughly nine or 10 times, compared with 17x or 18x in the U.S. Meanwhile, Chinese GDP growth is between 7% and 7.5%, whereas U.S. growth is less than half that.
Many of these Hong Konglisted names have great balance sheets (75% have net cash), high dividend yields (average 4.6%), and operate consumer-focused industries.
“It’s an area that should really bear fruit over the next few years,” Mr. Radin said. “It’s already started to happen.”
Other fund holdings also share these characteristics as more than 90% pay a dividend for an average portfolio yield of 3.3%, and more than half have net cash on the balance sheet.
“The strong balance sheets speak to the margin of safety in the portfolio — the downside support,” Mr. Radin said. “Companies were scared to death in 2008 and 2009, so they hoarded cash.
That is starting to change now as they are doing things like buying back shares and using the money to grow through acquisitions.”
Another area of focus is financials, which account for 38% of the fund. This is split between asset managers, brokerage firms and banks.
“That’s a pocket of the market where there is still a fair way to go,” Mr. Radin said. “There are still undervalued U.S. financial companies, despite the broader market being fully valued.”