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Paul Ehrlichman has been one of the world's best stock pickers in the past year. He told us how he built his portfolio, where he's invested today, and what he thinks it will look like a year from now.

Published by Business Insider on Thu, 15 Jul 2021

<p><img src="https://static3.businessinsider.com/image/60f03b03bb790e0018207b52-1500/ehrlichman-paul.JPG" border="0" alt="Mutual fund manager Paul Ehrlichman" data-mce-source="Legg Mason" data-mce-caption="Paul Ehrlichman's ClearBridge International Value Fund returned 62% to investors in the 12 months that ended May 31."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>With thousands of stocks to buy, where do you start'</p><p>It's a simple question, but it can seem like an overwhelming one. Paul Ehrlichman, an international fund manager for Legg Mason's ClearBridge unit, told Business Insider how he trims about 8,000 large-cap stocks to the roughly 50 he holds in his portfolios.</p><p>First, a quick explanation of what he's trying to accomplish. Ehrlichman wants stocks that are not only cheap right now, but ones that are cheap because Wall Street believes they are going to do almost nothing for years. And he's looking for the ones that have real, written-off potential.&nbsp;&nbsp;</p><p>"The thing that really differentiates us is this large gap where we're buying companies generally where almost no growth is priced in," he told Insider in an exclusive interview. "We're looking for companies that are delivering significant profitability that's being met with tremendous amounts of skepticism."</p><p>Lately the portfolio has been delivering the kind of returns that wipe out skepticism. <a href="https://www.kiplinger.com/kiplinger-tools/investing/t041-s001-top-performing-mutual-funds/index.php'table_select=IntlDiv">Kiplinger</a> ranks his ClearBridge International Value Fund as the third-best international diversified large-company stock fund for the year that ended May 31. During that period it delivered a 62.4% return.</p><p>Step one, Ehrlichman says, is finding companies that are inexpensive relative to the rest of their industry, their country of origin, and their own history. That last point is important because a stock that has always been cheap is probably cheap for a reason, and there's a good chance it will stay that way.</p><p>That eliminates about 70% of global stocks. After that, Ehrlichman examines companies individually based on their industries, their management, and their financial health. A struggling industry, poor management, or financial weakness will rule out more stocks.</p><p>He's looking for companies that check all of those boxes and are developing a stronger competitive position. In practice, they're often companies where analysts have belatedly raised their short-term estimates but remain pessimistic.</p><p>"There's a lot of companies in the portfolio, like the shipping stocks, like cement companies, like energy companies, where we see the sustainability and durability of profits being much stronger than expected," he said.</p><p>Ehrlichman says that the stock market has been rewarding innovators in areas like cloud computing, de-carbonization, and electric vehicles for years. But with many of those technologies going mainstream, the winners will be big-well-run companies that can enable mass application and not necessarily the inventors.</p><p>"They are leading companies. They aren't priced like disruptors because many of them were considered incumbents are victims," he said. "These are not victims of disruption. These are leaders in the transformation."</p><p>As examples, he says Volkswagen and Renault should be very successful as electric vehicles take off, and companies like Hitachi, Kion, CNH, and Glencore should benefit from greener energy even though they're seen as older industrial or mining companies.</p><p>That translates to a significant overweight to Europe because countries like the UK, Germany, and Switzerland get more of their GDP from manufacturing. And two of Ehrlichman's top stock picks today are in Europe. He says software maker&nbsp;<strong><a href="https://markets.businessinsider.com/stocks/sapgf-stock">SAP</a>&nbsp;</strong>could double in value in a few years.</p><p>"After a number of years of trying to fight this trend, or just kind of dance around some cloud acquisitions, the new management has fully embraced the cloud," he said. "We think SAP could be the next Microsoft."</p><p>He says Swiss cement maker <a style="font-weight: bold;" href="https://markets.businessinsider.com/stocks/hcmlf-stock">Holcim</a> will benefit from the diplomatic, infrastructure-related competition between the US and China, and from the need to build new sources of renewable energy.</p><p>"There is a tremendous amount of pent up demand in infrastructure. It's very difficult to build a renewable energy infrastructure without a lot of cement and fossil fuels and copper," he said.&nbsp;"If you have a company whose capacity is constrained by carbon de-carbonization, but demand is increased by de-carbonization, it's perfect."</p><p>While those trends are making European stocks attractive today, Ehrlichman says he's seeing hints about how his portfolio is going to evolve over the next year or two.</p><p>"We are looking at some of the Asian companies, the Asian industrials, and particularly some of the Asian consumer stocks, like Chinese gaming companies. Macau gaming companies look really interesting," he said. "That's where the big laggards are, and that's where the value is, and that's where the unrecognized growth is."</p><p><a href="https://www.businessinsider.com/how-to-find-cheap-stocks-tips-on-building-global-portfolio-2021-7#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/racist-origins-marijuana-prohibition-legalization-2018-2">How racism contributed to marijuana prohibition in the US</a></p>
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