By: Andrei Braghiş
There is one hedge fund that is particularly bullish on companies based in China. Shah Capital Management's top five positions include four stocks of companies registered in the country. Its major holding is UTStarcom Holdings (UTSI), a company Shah Capital is in the process of acquiring. Let us take a look at the financials behind this and the other top stock picks of the fund (see the original 13F).
Why pay attention?
It's important to track hedge fund sentiment, because on the whole, their best picks have been shown to outperform the market by as much as 18 percentage points a year. Best of all, retail investors can capitalize on this phenomenon, but they have to know where to look first. Learn the secrets of this strategy here.
Topping the holdings of Shah Capital Management is UTStarcom - a Hong Kong based company engaged in the development of telecommunications infrastructure products. The company's stock price had been in a downtrend from the start of 2013 till a bottom of $2.05 on March 22. The trend has since reversed, though, and the price has been growing ever since. This move was triggered after UTStarcom shareholders agreed on March 21 for the consolidation of the existing shares in a one-to-three share split reversal. Furthermore, on March 27, Shah Capital made an official offer to buy the shares of UTStarcom it does not yet own at a price of $3.20 per share.
The best of the rest
Another Chinese stock in the portfolio of Shah Capital is China Xiniya Fashion (XNY). This company engages in designing, manufacturing and sale of apparel. Its stock is traded at a trailing Price to Earnings (P/E) ratio of 2.40, which is significantly lower than the industry average of 19.30. The company has a cash reserve of $3.21 per share, almost twice the current share price, and a Levered Free Cash Flow of $12.83 million.
China Yuchai International (CYD) continues our list of overseas holdings. The company's stock price has been in a downtrend since a high of January 28, and has fallen 8% since the start of the year. The stock is trading at a trailing P/E ratio of 6.00, while a forward P/E ratio of 4.50 suggests the market expects the company to increase its revenue and earnings moving forward. Analysts predict revenue growth of approximately 7% in 2013 and 2014. China Yuchai shares have a beta of 2.00 and pay a dividend of $0.90, representing a 6.30% yield.
The final two
Fourth among the top holdings of Shah Capital is Chiquita Brands (CQB). Chiquita engages in the marketing and distribution of fresh produce in the United States. The stock is trading at a forward P/E ratio of 9.01 and has a beta of 2.12, making it a rather risky asset. Wall Street analysts have high hopes for Chiquita, which is a relatively under-covered stock, with two of them recommending the stock as a Buy or Strong Buy, with another Hold recommendation. The Street also has a price target of between $8 and $12 on the stock, with shares currently trading at approximately $8.60 a pop.
Last but certainly not least, the management team of Shah Capital has made small changes to their stake in Yingli Green Energy (YGE). The company's subsidiaries engage in the manufacturing and sale of photovoltaic products and accessories. The stock has a beta of 2.36 and a cash reserve of $2.12, which is 10 cents shy of its current share price. Analysts mainly recommend this stock as a Hold, and have set an average price target of $2.88-nearly a 30% upside from current levels.
Wall Street estimates that the company will increase revenues in 2013 and 2014, while registering negative earnings. Yingli is currently going through a restructuring period in a bid to move away from a vertical integration strategy, though it's difficult to ignore Shah's bullishness.
Shah Capital Management is heavily invested in stocks characterized by a high beta value, signaling that its equity portfolio is focusing on boom-or-bust type plays. The top five stocks are, however, active in different industries and this can be interpreted as a good move to diversify its equity holdings. Most of the top holdings are Chinese companies, for which financial information is scarce, thus difficult to be judged by the average investor. So, if you fancy investing in China, it might be wiser to let the market participants with specialized knowledge do it for you.