Shah Capital Management’s Top Stock Picks for Q4

Having previously worked at UBS, Himanshu H. Shah decided to sail on his own in 2005 and started Shah Capital Management. He uses a combination of fundamental and technical analysis to pick his stocks and is managing an equity portfolio worth in excess of $97 million at the end of September. His holdings are spread across a number of sectors, with a particular focus on technology and industrial stocks, which account for 67% of the portfolio. Shah’s top picks for the third quarter are a mixture of technology and energy stocks, as well as an engine manufacturer. Let’s have a look at the five largest equity bets Himanshu Shah has ended the third quarter with.

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In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8,000 funds in operation at present, Insider Monkey looks at only the aristocrats of this group, around 730 funds. Contrary to popular belief, Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge, not because they are not good at picking stocks on the long side of their portfolios. Hedge funds did in fact manage to outperform the market on the long side of their portfolios. In fact, the 15 most popular small-cap stocks among hedge funds has returned 102% since the end of August 2012, beat the S&P 500 Index by 53 percentage points (see more details here).

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Himanshu Shah’s top bet is still China Yuchai International Limited (NYSE:CYD), a manufacturer and seller of diesel and natural gas engines in China. During the third quarter, Shah added to his stake in the company, taking his holding to 2.84 million shares, up by 11% since the end of June. According to Shah Capital’s 13F filing, this position is worth approximately $35.2 million. The stock sports a Price to Earnings ratio of 4.79, which is significantly lower than the industry P/E average of 38.90. China Yuchai has a market cap of $517 million and is rewarding shareholders with an annual dividend of 1.10 per share, which represents an attractive yield of 8.3%. J. Alan Reid, Jr., the manager of Forward Management, is also a fan of China Yuchai International Limited (NYSE:CYD), having increased his stake by 8% during the second quarter to 487,332 shares. In general, the company is not very popular among the hedge funds that we track, as only eight funds have reported long positions at the end of the second quarter, while the value of their holdings fell by 12% to $56.7 million.

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UTStarcom Holdings Corp (NASDAQ:UTSI) has maintained its position as second biggest equity holding of Shah Capital Management as Shah has not made any adjustments to his holding of the stock. The fund has reported ownership of 10.6 million shares valued at $25.8 million, up from the value of $21.2 million reported at the end of the second quarter. A global provider of communication infrastructure, UTStarcom Holdings stock never returned to the heights prior to the dot-com bust. So far this year, it was lost roughly a quarter of its worth and has ended yesterday’s trading session at $2.18. At the end of August, analysts at Northland Securities have initiated coverage on UTStarcom Holdings Corp (NASDAQ:UTSI), assigning a rating of Outperform and a price target of $2.5 per share. Although only four elite funds reported stakes in the company at the end of the second quarter, their combined holdings accounted for nearly a third of its common stock and were worth $23.2 million. Jim Simons is one of the prominent investors who are bullish on this stock, having boosted his stake by 17% during the second quarter. His fund, Renaissance Technologies, held 572,397 shares at the end of June.

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On the next page we’ll discuss why Shah is betting on mining and energy companies, as well as the world’s top manufacturer of beauty products.

Himanshu Shah thought it was wise to buy Avon Products, Inc. (NYSE:AVP) on a low, as the stock has been trending lower for a long time now. Shah Capital now holds 2.81 million shares, a 1,000% increase over the quarter, worth some $9.14 million. One of the world’s top manufacturer and seller of beauty products, Avon has a market cap of $1.68 billion and pays an annual dividend of $0.24 per share, which represents a juicy 6.2% yield. The stock, however, has been heading south since mid-2013 and has shed nearly 60% of its value so far this year. Donald Yacktman is a big fan of Avon Products, Inc. (NYSE:AVP), having increased his investment in the company by 8% to amass 38.3 million shares during the second quarter – the largest position among the funds we follow. During the second quarter, hedge fund sentiment towards the stock has worsened, with the number of funds invested falling to 26, from 32 at the end of March. The value of their aggregate positions decreased by 30% to 420 million.

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Shah seems to have changed his mind about Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) during the second quarter. Whereas in the second quarter he had reduced his position by 17%, now he decided to boost it by 157% to 1.95 million shares valued at $8.51 million. Falling oil prices have significantly affected Petroleo Brasileiro’s revenues, which fell to $26 billion in the second quarter, down by 29% year-over-year. The company also posted a profit of $0.03 per share, down from $0.17 reported for the 2014 second quarter. The third quarter revenues are expected to decrease to $22.9 billion, while earnings are estimated at $0.06 per share. Elite funds hold only a small fraction of Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR)’s common stock, namely 1.3% of its shares, which were valued at $760 million at the end of June. The number of funds holding a position fell to 31 at the end of June, compared to 35 at the end of the first quarter. Billionaire Ken Fisher was among the fund managers that actually decided to step up their interest and has increased his stake by 12% to 9.64 million shares reported as of the end of September.

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Shah Capital’s top 5 stock picks for the third quarter is ended by Coeur Mining Inc (NYSE:CDE), a company that operates several gold and silver mines across North and South America as well as Australia. According to the fund’s latest 13F filing, Shah increased the holding by 51% to amass 2.20 million shares, a position worth in excess of $6.21 million. The slump in the gold and silver markets have hurt Coeur Mining Inc (NYSE:CDE)’s bottom line, as revenues fell significantly and profits turned negative. For the second quarter, Coeur Mining posted a loss of $0.12 per share and analysts expect things to have gotten worse in the third quarter, estimating a loss of $0.26 per share, with the company set to publish the report on November 2. At the end of June, Gilchrist Berg and his fund, Water Street Capital, held the largest stake in Coeur Mining among the hedge funds we track: 1.46 million shares, up by 2% over the second quarter. He is one of the 14 fund managers who had this stock in their portfolio and together they held just 5.1% of the company. The value of their combined holdings fell by 26% to $39.7 million.

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