Each week, aprofessional investor tells us where he'd put his money. This week: Alec Cutler, manager of the Orbis Global Balanced Fund, is looking on the bright side.
Over the long term, if you want to achieve superior returns, your portfolio must look very different from the overall market. But it cuts both ways. In the short and medium term, there will be times when the market rather violently disagrees with your choices. These periods can be painful, but also ripe with opportunity.
Three stocks in the Orbis Global Balanced Fund illustrate this point particularly well: Taiwan Semiconductor Manufacturing Company (TSMC), Pacific Gas and Electric (PG&E), and NetEase. We believe all three have been victims of excessive pessimism, which has obscured their promising long-term prospects.
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A chip-maker going cheap
TSMC (Taiwan: 2330) is the world's largest semiconductor foundry, manufacturing chips for both established designers such as Nvidia, Qualcomm and AMD, as well as newer entrants such as Google-owner Alphabet, Amazon and Apple.
As the dominant supplier of the most technically-advanced chips, TSMC has historically averaged a 25% return on equity. And as more devices get smart and already-smart devices get even smarter, we expect strong demand for TSMC's chips to provide a long runway for profitable growth.
Despite attractive fundamentals, TSMC is trading at a mere 14 times forward earnings and pays a 4% dividend yield. That's a below-average valuation for what appears to be a far-above-average company, and one we hope will be rewarding over the long term.
California's top utility
PG&E (NYSE: PCG) is the largest electric utility in California. Last October, the stock sold off following a series of devastating wildfires. Investors were fearful PG&E would be hit with a massive liability owing to a legal quirk that holds utilities accountable for all disaster costs if their equipment contributed to any degree.
Amid the uncertainty, PG&E prudently eliminated its dividend and implicitly threatened bankruptcy. At 12 times the fund's normalised earnings, PG&E trades at a 30% discount to its peers and the wider market. I believe this prices in too high a probability of a worst-case scenario. If our analysis proves correct, the actual expense is likely to be much lower than expected and the risk of future fire expenses is likely to be curtailed.
A chance in China
The headlines from China have been hard to ignore. An escalating trade war with the US is not good news and China's economic growth trajectory has been slowing significantly from its three-decade average of more than 9% per annum. But headlines don't tell the whole story. Taking a bottom-up view, there are still some compelling opportunities in the Middle Kingdom. One example is NetEase (Nasdaq: NTES), a video-game developer with an extremely loyal customer base. While investors are worried about tighter regulation of new game approvals, we expect this headwind will prove temporary and also note that the company has astutely navigated similar regulatory changes over the past decade.
We think that Netease, trading at just 13 times the normalised earnings of its core gaming business, stands to earn significantly more as its new ventures in e-commerce and music begin to pay off in the years to come.
Alec Cutler, Bachelor of Science (Honours) in Naval Architecture (United States Naval Academy), Master of Business Administration (The Wharton School of the University of Pennsylvania), Chartered Financial Analyst. Alec joined Orbis in 2004. Based in Bermuda, he leads the multi-asset team, is one of the Portfolio Managers for the Orbis Global Balanced Strategy, and has overall responsibility for the Strategy. He previously worked for 10 years at Brandywine Asset Management LLC managing the Relative Value strategy, co-managing the Large Cap Value area and co-managing the firm as a member of the Executive Committee.
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