Q. Vahan, although you primarily recommend US equities, your newsletter also includes a few international picks, such as American Oriental Bioengineering (NYSE: AOB) and Embraer (NYSE: ERJ). What factors made you choose these companies?
A. I do recommend foreign companies from time to time in the Forbes Growth Investor, but only if they trade on US exchanges and only if they show up at the top of my screens. I rely on a quantitative model that screens stocks based on the probability of out-performance over the next six to 18 months. I like AOB because it sells traditional Chinese plant-based pharmaceuticals in China. Demand is very strong for these natural products in that country. I like ERJ because it gives us exposure to Brazil, which has one the fastest growing economies in Latin America.
Q. Several of your recommendations are US-based multinationals, such as RPM (NYSE: RPM) and Amdocs (NYSE: DOX), both of whom do significant business around the world. How important was their international exposure to your selection, and why?
A: International exposure is not something I normally focus on. Besides, these days most mid- to large-sized companies have at least some international exposure. Because the global economic outlook is so uncertain at this time, I felt more comfortable with companies that have a diversified revenue stream.
Q. What are the most important parameters that you choose in selecting growth stocks?
A. I don't focus on stocks with high price-book or other multiples. Instead, we use a dynamic quantitative model that [includes] price and earnings momentum, standardized unexpected earnings, and analyst upgrades. There is a plethora of academic research proving that stocks with the strongest momentum tend to be the growth stocks.
Q. Commodity stocks have recently taken a beating, especially agricultural companies that had been high flyers, primarily due to sharply lower world demand. Do you see any positive news for agricultural companies?
A. I have avoided energy stocks because I was convinced that oil prices were in a bubble. Unfortunately, I did have some exposure to agriculture and have taken a hit in that industry. The good news is that many of these former high fliers are now selling at value prices. I would not be keen to jump out of them now.
Q. Your recent newsletter discussed the US bailout of our financial industry. Does this crisis change your view of the companies in your portfolio; your investment decision process, and your view on adding more international companies to your portfolio?
A. It does not change my view of the companies in my portfolio. I have been very light on financials for some time primarily because I anticipated problems in this sector. I have also avoided home builders. Although I would still avoid home builders, I am becoming more interested in financials, but I am in no rush.
[The crisis] also does not affect my investment decision process in this newsletter. While I change the sector weightings based on my macroeconomic outlook, I don't engage in market timing or asset allocation. However, I believe all investors should identify a proper asset allocation for themselves based on their objectives and constraints; and they should rebalance their portfolios from time to time to make sure they don't stray too far from their targets.
[Additionally], I don't believe in the decoupling theory. I have long been convinced that a significant economic slowdown in the US would spread to other major economies. As a result, investors are finding that international diversification does not provide as much protection as they might have hoped. I have learned from experience that diversification often provides the least protection when that protection is needed most.
Nancy Zambell edits the Global Investing page for MoneyShow.com. Her opinions are her own and not necessarily the views of InterShow or MoneyShow.com.