Insights from the #1 China Fund
02/17/2014 10:00 am EST
The Oberweis China Opportunities Fund is the top-ranked China-region fund for the past one- and three-year periods. Here, fund manager Jim Oberweis walks us through his investment process and highlights some current favorite stock ideas.
Steve Halpern: Joining us today is Jim Oberweis, who many of our listeners know from the Oberweis Report, a top financial advisory service focused on small-cap stocks. How are you doing, Jim?
Jim Oberweis: Great. Pleasure to be here. Thanks so much.
Steve Halpern: Now, in addition to your well-known newsletter, you're also the portfolio manager for the Oberweis China Opportunities Fund, which, not only earned Morningstar's highest five-star buy rating, but is the number one ranked China-region fund for both the past one- and three-year periods. Could you walk us through the stock selection process that led to such strong ratings?
Jim Oberweis: Sure; so, our stock selection process is quite similar to the same process we've applied in the US for the last 25 years. Effectively, we try to find smaller, high growth companies that are really on the cusp of change, typically driven by new products.
We look for companies that have a barrier to entry and a strong market position, often times within niche markets, so, what does that mean? It means our success or failure is much more predicated on our ability to pick stocks than an overall GDP. We're kind of looking for hidden gems in barrels where there are just not a lot of people looking.
We tend to focus on very, very high growth companies where plus or minus 100 basis points in GDP isn't going to drive the business one way or another, but market penetration is really the name of the game, so it's much more a, kind of, on-the-ground, bootstrap approach toward looking at individual companies rather than trying to make large macroeconomic calls.
Steve Halpern: Now, are you also focused on the valuations of those companies?
Jim Oberweis: Yeah, absolutely, so we call our process aggressive growth at a reasonable price, meaning we look at very high growth companies, but only when the valuations make sense. Now, don't get me wrong, we're willing to pay premium valuations in absolute terms, as long as the growth prospects of the company justify paying a higher price.
Steve Halpern: Now, instead of relying just on paperwork or information that's sent from China, you actually have team members on the ground who visit with companies and you, on occasion, visit directly with companies in China. How important is that direct approach to your stock selection process?
Jim Oberweis: Yeah, it's important. I mean, our approach was always we know how to pick stocks in areas where there's rapid change and high market inefficiencies. Where we have really, I think, done a great job is building out a team of folks with local culture and language experience; although, most of our team was educated at top ten MBA schools in the US.
My co-manager and my partner John Wong, MBA from Stanford, he's a Singaporean—first language is Mandarin. Two analysts with MBAs from Wharton and Columbia that are there all the time; it's a full-time job and they're based in China and really kicking the tires.
As you can appreciate, financials are a little different in China. Having a relationship, and having on-the-ground presence, and ability to go and physically look at companies and do your own due diligence, it's really a must in China.
Steve Halpern: Now, the media appears obsessed over concerns that China's growth could be slowing. Do you share that concern or do you think this overall negative sentiment is creating a longer term opportunity?
Jim Oberweis: Honestly, I think it is creating an opportunity. We have been doing this for eight years and, if you look back, there's been, really, the full gambit and spectrum, in terms of enthusiasm towards China, from anywhere from disdain when we first started, to over exuberance a few years ago, and now we're back to almost hatred of Chinese equities.
I'd much rather own Chinese equities when they're unpopular rather than when everybody loves them, because the valuations tend to much better. Remember, based on what I told you before, we're not buying the banks and the state-owned enterprises and the telecom companies that are really tied at the hip to GDP.|pagebreak|
Instead, we're buying those explosive growth e-commerce companies—companies that are figuring out how to clean up the environment, or emerging brands in China, which certainly have some economic sensitivity, but they're much more tied to the success of the brand, the competence of management, and the quality of the company's products or services.
Those are the companies we try to own and I think there's some natural resistance to overall macro.
Now, the part we can't predict, and the part that's very hard, is overall international appetite for equity risk. In other words, our companies tend to get lopped in with Chinese equities, broadly, most of the time. That doesn't mean that underlying businesses are executing that way, but the changes in the valuations of the businesses in the short run can certainly be influenced by low market returns.
We're in the business of performing well, and when the valuations come down, that tends to lead to some of the best opportunities to buy companies in our space.
Steve Halpern: Maybe you'll share a couple of those opportunities directly with our listeners and perhaps tell us a few names of the stocks that people should have on their radar.
Jim Oberweis: Yeah, you know, and I'll give you an example of names that people hate too, because sometimes those can be some of the most exciting ones. One, if you pull up—that's been in the news a lot lately—as shareholder, is a company called NQ Mobile (NQ).
When people hate Chinese equities it's really easy to call—to use the word fraud and point the finger without a lot of documentation and really bring down the price of stock. That happened at NQ.
We had a reasonable sized position when Muddy Waters wrote a report. We actually became the largest shareholder of the company and brought our position to 1.8 million shares, at, around, $11.
I was there in China. I visited the company, I went to the bank, I checked their financial statement, we met with their companies, we met with the distributors, we met with everybody and walked away thinking that, at a minimum, the bearish reports were greatly, greatly over-exaggerated and more likelym were just wrong.
Anyway, the stock is back up to $18 but we still like it here. We think at this level it's a great price.
And another one—many of you know I grew up in the dairy business in the US, which is a very hard business to make business, but in China it's a growth business and I would recommend China Modern Dairy Holding, that's (HK:1117) on the Hong Kong exchange.
They're going to benefit from the mismatch between a very much growing demand for milk, and a contracting supply, as cattle are slaughtered to sell for beef.
We think you can be as arcane as a dairy farmer, or as high tech as a data center, or play companies that are trading at absurd valuations, because people are pointing accounting fingers that might not be well-researched.
Steve Halpern: Now, these are all stocks that are held in the Oberweis China Opportunities Fund, is that correct?
Jim Oberweis: That's right, yes.
Steve Halpern: So, for somebody who's interested in buying them via the fund, let me just point out that the symbol is (US:OBCHX). Thank you very much for joining us today.
Jim Oberweis: My pleasure.