Friday, January 21

Where to look for attractive valuations and superior long-term returns


Dodge & Cox sees investment opportunities in value stocks, Chinese Internet stocks and global stocks outside of the United States, Vice President Lily Beischer said during a Nedgroup Investments Multi-Management webinar.

Nedgroup Investments Multi-Management includes the Dodge & Cox Worldwide Stock Fund in their wallets.

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“We want to own companies with attractive valuations and the potential for superior long-term profitability. Those opportunities appear today in the value parts of the market versus growth and internationally, including China, rather than in parts of the US market, ”he said.

He added that one of the most exciting investment opportunities was the steep discount value stocks trade relative to growth stocks. For example, growth stocks trade at a multiple of 28 times future earnings, twice the price-to-earnings ratio of 14 times for value stocks. The multiples at which growth stocks trade have a lot of room to disappoint, he said.

Value stocks were up 42% for a year, while growth stocks gained 26%.

“Within this rally, core value sectors have risen significantly. Finance was up more than 50% and energy almost 70%. The Covid-19 bottom bounce has barely made a dent in that huge long-term discount that has opened up for the stock over the past five years, ” Beischer said.

Dodge & Cox was overweight in value stocks, emerging markets, and international stocks outside of the US, but underweight in the US.

Chinese technology

‘Within [emerging markets], the real thrill is China. China accounts for approximately 4% of the fund per domicile. We continue to invest in Chinese Internet companies and add more positions.

“These big Chinese Internet companies are down 55% since their peak in February. That contrasts with the Nasdaq, which was up 8% during that period. So there is a lot of concern about all the recent regulatory announcements. Then of course there is Evergrande, the power shortage and the questions about GDP growth, ”Beischer said.

‘Chinese Internet stocks used to trade at a modest discount to the FANGMAT [Facebook, Apple, Netflix, Alphabet/Google, Microsoft and Tesla] complex, but now they are about half that level.

“On the other hand, large Chinese technologies used to trade at an 80% premium to the MSCI All Country World (Acwi) index, but now those stocks are as attractive as the Acwi. But the Chinese internet is expected to significantly outperform the FANGMAT complex and certainly grow much faster than Acwi, ” he said.

‘Big Chinese tech companies are quite critical to China’s goals of technology self-sufficiency and technology leadership. We all know that these companies are investing in critical innovation areas for China’s future in artificial intelligence, automated vehicles and the cloud, ”said Beischer.

Dodge & Cox believed that many of the issues were not specific to China, including data security, general data protection regulation, and antitrust regulations.

‘These are being discussed in major markets around the world. One benefit for China has been that several of the problems and solutions China has identified so far were resolved relatively quickly.

‘We would observe that [Chinese] Government officials reached out to investors to clarify the government’s agenda and highlighted the importance of private enterprise. These companies are important to China’s common prosperity goals, as they improve access to goods and services for a large part of the Chinese population, ”said Beischer.

Dodge & Cox has lowered its expectations for Chinese technology in its models, including growth, margins, taxes, and the use of free cash flow.

“Even considering these more conservative assumptions, the valuations still look attractive,” he said.

Justin Brown is a reporter for Citywire, providing insights and information for professional investors around the world.

This article first appeared on Citywire South Africa hereand republished with permission.


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