Bad news for investors, at least for certain ones: The dollar will collapse against Asian currencies over the next two decades. Good news: China and India will evolve from devourers of basic materials into full-blown consumer economies, creating demand for US exporters.
These are two of the premises behind stock picks from Stephen Fan, a money manager in Mountain View, Calif. with a fondness for midcap technology stocks. One in his portfolio is MEMC Electronic Materials, a St. Peters, Mo. firm (once part of Monsanto) that makes silicon wafers for the semiconductor industry.
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Last year sales outside the US accounted for two-thirds of MEMC's $1.1 billion in revenues, with the bulk going to customers in Japan, Taiwan and South Korea. If Asia rockets as Fan expects, MEMC will likely go along for the ride. With shares at $35, MEMC goes for 5 times expected 2006 sales and 18 times expected earnings.
Fan, 53, is a Taiwan native and the author of a Stanford Ph.D. thesis on international finance. For a big believer in Asian growth, he is surprisingly sanguine about US prospects. Think of the post-World War II golden years, only this time powered by three big economies instead of just one.
Says he: "I wouldn't be surprised, five or ten years from now, to see [real] US GDP growth averaging 5 per cent," as US companies satisfy Chinese and Indian demand for all manner of goods, especially technological ones. Companies with midsize capitalisations, which he defines as those between $1 billion and $15 billion, make up $110 million of Fan Asset Management's $180 million institutional portfolio.
Fan claims a 9 per cent compound annual return on his midcap portfolio since its inception in January 2002, versus 8 per cent for the Russell Midcap Growth Index.
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Fan, who travels to Asia at least once a year, also likes the outlook for MEMC's product mix. Beyond the microprocessor market, the company is expanding polysilicon production to make wafers for solar panels. Between that and the Asian presence, says Fan, MEMC should produce outsize earnings in the coming years.
Fan starts quantitatively, running 600 companies through 12 to 15 financial screens for such factors as revenue growth, profit margin and debt/equity ratio. He also wants to see that analysts reporting to Thomson IBES have revised their profit forecasts for a target company upward and that reported profits come in close both to consensus forecasts and to projections from the company.
Next, he selects companies likely to benefit from such trends as the retirement of baby boomers, the growth of consumerism in Asia and the exit of foreign capital from US markets. Yum Brands, for example, may do well as Asian savers cash in their Treasury bills. Its KFC chain, already the largest in China, is opening a new store there every day.
Another Fan pick is SanDisk, which makes flash storage for digital cameras and mobile phones. It's a pricey stock, at 20 times projected 2006 earnings (albeit only 17 times the 2007 projection), but a winner if Fan is right that hundreds of millions of newly prosperous Chinese and Indians will clamor for handheld electronic toys.
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