Trade friction between the U.S. and China is one of the key reasons behind this month's stock market...
09/09/2015 10:00 am EST
While many are fearful of market volatility, Jim Oberweis, Jr., money manager and editor of The Oberweis Report, sees opportunity. Here, he highlights several of his favorite ideas for long-term investors, ranging from China ADRs and Hong Kong listed shares to well-positioned small-caps in the US market.
Steven Halpern: Joining us today is Jim Oberweis, Jr. money manager, small-cap expert, and editor of The Oberweis Report. How are you doing today, Jim?
Jim Oberweis: I’m great, thanks. Appreciate the opportunity to be on the show.
Steven Halpern: As a leading expert on China, could you explain to our listeners what in the world is going on with the China market and why is Wall Street so obsessed with each report out of China?
Jim Oberweis: Sure. I mean, right now the growth in China is slowing. It’s been slowing for the last two years. There’s nothing really new to the table, except that it’s just on the forefront of the world’s mind right now. In part, spurred by the volatility in the Asia market.
Just recognize that the Asia markets aren’t what most international investors own, including in our China Fund. Instead, we invest in China through Hong Kong listed Chinese shares, and to a lesser degree, US ADRs.
Those haven’t had the same degree of swing, so they certainly have had above average volatilities, so what I think you’re seeing is volatility in the local Asia markets spur investor interest, just because of the degree of the volatility, but I don’t think there’s a lot of new news here. I think you’d have to have been living under a rock in Antarctica to not recognize that growth in China is slowing.
Steven Halpern: Now, Oberweis China Opportunity Fund (OBCHX) has an average annual return of over 15% since its inception, back in 2005. Given your long-term perspective, is the pullback in China a buying opportunity or are we suggesting most investors wait on the sidelines for now?
Jim Oberweis: No. I think we’re starting to get close to some pretty attractive levels to be buying. I mean, it’s one of the few marketplaces in the world where you’re able to see valuations that are sharply below the longer-term average. Let me be clear, when I say China, what I’m referring to are the Hong Kong listed shares.
The A-shares to me still appear to be overvalued, but the Hong Kong shares, like those that we own in our fund, I mean these valuations, these are 2008-type crisis valuations and the single biggest determinate of future returns and investing in China over the last ten years has been the average PE ratio that you’re buying on the day that you’re buying it.
In other words, buy them when everybody hates China, sell them when everybody loves China. It’s a really simple strategy, but it’s extremely effective and it’s been the most deterministic variable than any other, in terms of looking at future return potential.
Steven Halpern: Now, is it fair to say that you generally look at a market like China from a long-term or multi-year perspective rather than worrying about any of the interim ups and downs?
Jim Oberweis: I’d probably worry. I worry every day, but I think you have to look at why there are these interim ups and downs, okay? So when we look at a market like we’ve seen in the last couple of weeks, this is a market environment that’s being driven by emotion. There’s no real big news that’s out that’s really driving the market.
Sure, there’s data points every day that point one way or another, but something that would drive the types of volatility that we’ve seen in the last few weeks, that’s not being driven by data, it’s driven by emotion. We want to be exploiters of volatility that’s adversely moving based on emotion.
So I guess the answer is, yeah. I’m starting to get pretty excited about China. US stock valuations have come down, but they’re still kind of in the range of average. China is dirt-cheap, relative to its historical average.
Steven Halpern: Would you be kind enough to maybe cite a few individual names among either the Hong Kong shares or ADRs for somebody interested in establishing a position in these markets?
Jim Oberweis: Yeah, sure. I mean let’s start with some of the ADRs because those are going to be the easiest ones. One of my favorite ideas is a company called VipShop (VIPS).
They’re kind of the TJMax of China, but they only operate online, so they sell a brand of merchandise at steep discounts online and they’re continuing to grow, despite some of the slowdown in China. We would also start to look at some of the larger-cap names like Alibaba (BABA) at today’s valuation.
Or a small-cap name, Tarena International (TEDU), provides professional education services, so they’ll teach, for example, students how to program using JAVA and it’s a typical class that they may have.
One other one you might take a look at is Shenzhou International (HK: 2313). Shenzhou manufactures clothing for companies like Nike, Addidas, and Unico.
So if you think about what’s happening is the yuan depreciates or is devalued, it’s actually good for exporters like Shenzhou and they’re one of the few export companies that we own.
But they’re going to be a beneficiary from the exchange rate volatility that we’ve seen, without being hampered by the slowdown in China because their customers generally aren’t in China. They’re in Europe and the US, the end demand for the clothing apparel that they’re being manufactured.
Steven Halpern: Now, aside from your focus on international investing, you’re also well-known for your expertise on US small- and micro-cap stocks. Is the global volatility we’re seeing creating an opportunity here in domestic shares, in particular, in the small-cap area?
Jim Oberweis: It is. Valuations have come down quite a bit in the last two and a half weeks, so it’s by valuations for smaller high growth names in the US to levels that are slightly below average. You don’t see the same degree of valuation differential from average that you do in China, but you also don’t have the same kind of slowness.
From what we’re seeing in the US, business is actually firming up a little bit, whereas in China, it continues to slow. Just to be clear, growth levels in China still exceed those in the US, but it’s the relative direction.
Sometimes it tends to move the market and growth relative to expectations. I think in the US we’re seeing companies beating expectations and in China they’re beating expectations, but only in certain industries.
Areas like e-commerce, environmental protection, and healthcare are probably good areas to be in, but broad consumer retail stocks in China, that’s kind of been a little bit weaker area.
Steven Halpern: Now, looking at the US small-cap market, could you share a name or two of stocks that you do feel likely poised to outperform.
Jim Oberweis: Sure. One name that we do like, it’s kind of a cross between China and the US is IMAX (IMAX) and it’s a Canadian large-format movie company. They’re benefiting, not only from a rapid expansion in China, but they’re also benefiting from a strong film slate for the rest of this year, so that would be one to take a look at.
Another that you might take a look at is Ligand Pharmaceuticals (LGND) and Ligand develops controlled release delivery technologies and technologies that stabilize complex molecules. That technology is then incorporated in other drugs.
It’s one way to play the biotech boom without having the binary biotech risk because these technologies are used by large pharmaceutical manufacturers and incorporated into other drugs and then Ligand gets royalties back.
So, for a small company, they have a quite diversified portfolio of royalty streams without having the binary risk that’s typically associated with a biotech type company.
Steven Halpern: Again, our guest is Jim Oberweis, Jr. Thank you for your insights today.
Jim Oberweis: Thanks.
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