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.

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).

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.

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.

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.