By William Lam, co-Head of the Asia & Emerging Markets Equity team, Invesco
Key takeaways:
- The attraction of unloved stocks
The reason we own an unloved stock is that we hope it will one day turn into a market darling. We can then ‘ride the transition from contrarian to popular’.
- Long-term relationships can pay off
Some stocks we hold were once deeply unloved, but they’re now some of the most popular stocks around and have multiplied in value.
- The allure of growth stocks
Sexy growth stocks have lost much of their allure recent months. But while they certainly deserve a second look, we’re not ready to commit.
Valentine’s Day always prompts me to reflect on some of the stocks I’ve had long-term relationships with. But I’m also turning my attention to some companies which are experiencing a distinct lack of love from the market.
As a contrarian investor, when I own an unloved stock the whole point of owning it is that I hope it will one day turn into a market darling.
This is what I mean when I talk about “riding the transition from contrarian to popular” for our core Asian equity strategies. Perhaps our favourite example of such a transition is NetEase, which was deeply out of favour in 2012 because anything that was Chinese and listed in the US was somehow thought to be a fraud.
Nowadays, NetEase is one of the most popular stocks in our benchmark and it’s soon to launch a Harry Potter game globally. The share price is now almost exactly ten times higher than it was ten years ago.
A more recent example is Mediatek. In 2017, it simply didn’t have a good enough chip design for 4G mobile phones and was forced by competitive pressures to bring out a product that wasn’t quite ready. We bought the stock, despite the fact that it was barely making any money from that 4G product. Now, five years later, it’s raking in the profits from its 5G product and the share price has increased by more than five times.
To bring this discussion right up to date, in February 2022 we’re in the midst of quite an extraordinary transition. What had been seen as perfect examples of ‘value traps’ are suddenly back in favour.
A stock like CK Hutchison has for years been scorned by most investors and even though it’s still a US$29bn market cap company, sell-side analysts over the last few years have frequently not bothered writing reports on the stock due to lack of interest.
But CK Hutch owns the ‘Three’ branded telecom networks in Europe and at the start of 2022 there’s quite a lot of optimism that telco consolidation is back on the agenda after many years. CK Hutch also derives a lot of its value from utility businesses that have inflation protection built into their contracts.
Inflation is clearly high on the agenda and investors are looking for companies that can benefit from an inflationary environment. We could take the view that CK Hutch after a 20% share price rise in the last couple of months is back in favour, that the good news is in the price, and therefore, that the stock is sellable. But our judgement is that the transition is still in its early days, and we have therefore decided to stick with it. Moreover, it’s currently trading at a 50% discount to the sell-side sum of its parts.
One of the stocks I discussed last February as an unloved stock was China Overseas Land, a Chinese property developer. Like CK Hutch, it’s now riding the wave of the growth-to-value rotation and the stock is now trading at 0.7x price-to-book instead of 0.5x price-to-book.
Our thesis is playing out: this is a very well-capitalised developer in an environment, where rivals are under a lot of financial pressure. But we are under no illusions – this company and this sector are never going to win any popularity contests and we do expect we’ll part company with this holding at some stage in the next couple of years.
So, what about the sexy growth stocks which have lost so much of their allure in the last few months? Are they now attractive to us?
We are certainly taking a second look at some internet companies – one Chinese ecommerce player is down nearly 70% in a year and another internet company more focused on south-east Asia is down a more modest 45%. But we haven’t stepped in and bought either of these yet, partly because we do already have holdings in this sector (a couple of which have performed just as poorly).
One growth sector where we have very little exposure – if any – is Chinese healthcare, and we are taking a much closer look at this sector after its sharp correction. But unfortunately, we feel the valuations in the vast majority of cases are too demanding for us to commit client money just yet.
We remain broadly faithful to the companies we were invested in a year ago. These relationships are working. We admit we are getting more tempted by some of the alternatives, but we haven’t made any significant moves yet.
