Investors may be running away from assets with exposure to China after a turbulent week that slashed 10 percent off the benchmark Shanghai composite, but one analyst says there are at least two companies worth holding on to.
Rio Tinto
Miners and commodities companies bore the brunt of the losses during the market sell-off this week, but Rio Tinto is the only mining stock that GLG Partners Fund Manager Henry Dixon says is currently mispriced.
The company's London-listed shares are down nearly 30 percent over the past six months, and 11 percent in the last week alone.
Dixon admitted that Rio has had its fair share of historical lows — including a widely criticized deal where it bought Canadian mining company Alcan at a 65 percent premium in 2007 — but says things are looking up for the mining giant.
He believes the company is in a position where it can deliver a free cash-flow yield that is "comfortably over 5 percent" — which Dixon explained is much higher than the market average. Rio Tinto has also managed to heavily reduce its debt, he said, putting them in a position to bounce back despite a downward trend in the market cycle.
"If there is ever a way to ensure that cyclical pressures become terminal for equity holders, it's leverage... and in a situation with Rio's we actually think they've done a reasonable job in navigating that leverage argument," he said.
"But where you see lots of leverage, no cash generation and pretty modest market caps, the outlook looks pretty bleak for shareholders in those situations."
Burberry
Luxury fashion retailer Burberry has also seen grim losses, due in part to waning luxury goods consumption across Asia.
The stock is down over 28 percent over the past six months, and nearly 9 percent over the past week, but Dixon highlighted the dangers of chasing stock prices alone.
With 20 percent of the company's market cap in cash, "there's huge financing firepower that's going to keep this company in business," Dixon said.
This might not pan out for short-term investors, he said, but is likely to deliver on a one to three year view.