John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds.
When the United States plunged into a financial crisis in late 2008, Pacific Investment Management Co. LLC bond guru Bill Gross advised investors to "shake hands with the government." That is, Mr. Gross advocated investing in companies that were getting major support, through bailouts or stimulus packages, from the government. It's a theory that seems to make sense - if the government is going to back a company or throw a lot of business its way, the chances of that company's success get a major boost.
Now, some market watchers are saying investors have another chance to shake hands with the government - a different government. China's sovereign wealth fund, China Investment Corp. (CIC), has filed a new stock holdings statement with the U.S. Securities & Exchange Commission, and a number of well-known U.S. companies are on the list. Coca-Cola, Johnson & Johnson, Citigroup, Bank of America, Apple - all these and several others are garnering CIC's interest.
China has huge cash reserves and a lot of money to invest, giving it the ability to move markets to some degree. But that doesn't mean you should blindly follow CIC's stock picks - or anyone's stock picks, for that matter. Investors should always do their own analysis of a firm and its stock to see whether it meets their own investment strategy.
With that in mind, I thought I would look through some of CIC's larger holdings to see which pass muster with my Guru Strategy computer models, which I developed after studying the approaches used by some of history's best investors.
Read about investing in China:
Interestingly, CIC's two biggest U.S.-traded stock holdings - Vancouver-based mining company Teck Resources Ltd., in which CIC has a $3.54-billion (U.S.) stake, and U.S. financial firm Morgan Stanley ($1.77-billion) - get little interest from my models. Teck's inconsistent earnings history and weak returns on equity and capital are reasons it falls short, while Morgan Stanley's poor earnings history, negative free cash flow, and low yield make my models skeptical of its prospects.
Other CIC holdings do look attractive, however, including the group's third-largest U.S.-traded holding: investment management firm Blackrock Inc. Blackrock, in which CIC has a $714-million stake, gets some interest from my Martin Zweig-based growth stock model. This approach likes that Blackrock has been boosting earnings per share at a strong 22.5-per-cent pace over the long term (based on an average of the EPS growth rate over three, four and five years), and an even better 42.1-per-cent rate in the most recent quarter (versus the year-ago quarter). It also likes that Blackrock has been increasing revenue at a long-term rate of almost 60 per cent (again, using an average of sales figures over three, four and five years).
The Zweig-based approach is concerned that Blackrock has had three weak earnings growth quarters in the past two years, however, and because its EPS dipped in 2009. But over all, it gives the stock a solid 85-per-cent score.
PICKS OF THE CIC LITTER
Blackrock isn't the only CIC holding that my strategies favour. Here are a few others:
Coca-Cola Co.: CIC has a $9-million stake in this global beverage giant, and two of my Guru Strategies think it's a good pick. My Warren Buffett-based model looks for firms with strong histories of earnings growth, high returns on equity, and manageable debt, and Coca-Cola delivers. Earnings per share have dipped in only one year of the past decade; its 10-year average return on equity is 29.4 per cent; and it could pay off its $5.1-billion in debt in less than a year, if it so chose.
My James O'Shaughnessy-based value model also likes Coke. This model targets large firms with strong cash flows and high dividend yields. Coke's $126-billion market capitalization, $3.54-per-share cash flow, and 3.2-per-cent yield fit the bill.
Johnson & Johnson: The health care power is another favourite of CIC, which owns $9.3-million of its stock. It's also a favourite of my O'Shaughnessy and Buffett models. The O'Shaughnessy value approach likes the stock's size, strong cash flow, and solid yield. The Buffett-based model, meanwhile, likes that J&J has raised EPS in eight of the past 10 years, and that it has a 25.9-per-cent, 10-year average return on equity.
Abbott Laboratories: CIC owns $2.7-million worth of stock in this health care firm, which gets high marks from my O'Shaughnessy model because of its size, strong cash flow, and dividend yield.
Disclosure: I own shares in Apple, Coca-Cola, J&J and Abbott.