A Focus on China
12/03/2004 12:00 am EST
Donald Straszheim may just be in the right place at the right time. A leading expert on China, his portfolio—primarily US-based companies involved in China— rose 18% in just the past two months, while the S&P 500 gained 4.4%. Here are some of his latest favorites.
"The majority of our stock picks are based on our belief in China’s positive long-term prospects, looking for stocks that can ride that wave. Our stock selections are based on a two-year time horizon.
"Nike (NKE NYSE) is a major global producer, distributor, and seller of footwear, apparel, and associated sports gear with a reputation for quality and innovation. Almost all production is now overseas. China is the main growth driver, 66% last year. The stock’s market cap is $22.5 billion. The company is well-managed, with a strong brand name and customer loyalty. Global operations are now 53% of revenues, and getting larger. The company has long-time experience in sourcing outside America. Its five-year earnings per share growth of 14% should be sustained. Its p/e at 22 is okay for a quality stock like this one, in our judgment. The price is at all-time high, but we expect more of the same performance. Our target price is $117 by November 2006.
"UPS (UPS NYS) is the world’s largest package distributor and global leader in supply chain services of various types. UPS has been serving China since 1988, and is the only US cargo carrier providing daily, nonstop service between the US and China. UPS sees China as the most exciting growth opportunity in the world. As China grows inland, demand for UPS-like services will grow even faster. Supply chain skills are the lifeblood of Chinese manufacturers. Service is now offered to Shanghai; next year it will be offered to Guangzhou. The stock is at all-time high, but we think there is more to go. The stock is expensive, but is a top quality selection. The firm’s five-year earnings per share growth is 19+%. Our target price is $115 by November 2006.
"Procter and Gamble (PG NYSE) makes and markets products worldwide with a long-term top reputation. International is now PG's major thrust with 21% sales growth last year, which was higher than domestic sales growth. In June, the company bought the remaining interest in a joint venture with Hutchison Whampoa in Hong Kong. So, PG now has 100% ownership in their China business. As China continues to grow and enjoy rising living standards, Procter and Gamble is well positioned to capitalize on this growth. The stock price is back near its 1999 all-time high, with a p/e of 22. The market cap is $134 billion. Dividends are about 1.9%, yielding an income cushion for conservative investors. Our target price is $68 for October 2006.
"Home Depot (HD NYSE) is the world’s largest home improvement retailer. It has been under challenge in America the last few years by rival Lowe’s. Home Depot's market cap is $94 billion. The stock is at annual high, but just back to where it was before the late-1999/early-2000 market spike. We see the company as much better positioned now than then, in contrast to many of the high-flying tech companies of the day. They have a major China focus, far more than their competitors, and are better situated. The China market is growing twice as fast as in America, maybe more, and HD is doing a great job of sourcing from there. They should be very competitive in China. Our target price is $56 by November 2006.
"In addition to individual stocks, the exchange traded funds, iShares MSCI-Taiwan (EWT ASE) and iShares MSCI-Hong Kong (EWH ASE) are excellent ways for individual investors to participate in the greater China economic expansion story. In Taiwan this last month, economic activity remained strong and equities have advanced nicely. Tensions are somewhat reduced between China and Taiwan, and we remain of the view that they will ultimately be defused. But investors who are nervous about these geopolitical events might, understandably, want to underweight Taiwan. In Hong Kong this last month, the markets also improved, in sympathy with global equity gains and as a reflection of ongoing strength driven largely by China."