Truffle aims to sniff out bargains

Truffle Asset Management, the boutique investment firm founded in 2008, says that while it can understand investors wanting to take advantage of a recovery in the rand to diversify their wealth offshore, they may be better off buying “bombed out” local stocks that offer better value and return prospects over the next five to seven years.

Truffle Asset Management, a boutique investment firm founded in 2008, says that while it can understand investors wanting to take advantage of a recovery in the rand to diversify their wealth offshore, they may be better off buying “bombed out” local stocks that offer better value and return prospects over the next five to seven years.

The Johannesburg-based asset manager, which oversees about R32bn in assets, said that SA stocks are still “generally not expensive” despite a rally in the JSE all share this year that made it one of 2021’s best-performing emerging-market bourses in dollar terms. With the rand trading at near a 16-month high of R14.06/$, after dipping briefly below the R14/$ mark on Monday, many investors might be tempted to use the local currency’s recent strength to expand their offshore portfolios.

“To externalise money right now from a country risk and diversification point of view is sensible, but the question is where one puts that money — many of these developed markets are expensive, particularly the US,” said Iain Power, chief investment officer at Truffle. “There’s definitely an opportunity for investors to still earn above-average returns from some of the bombed out SA assets, which, along with good value stocks and global emerging markets, are probably more attractive than big US tech stocks that have been the big winners in the last few years.”

Power said that much of the all share’s advance this year was driven by the top 40, dominated by index heavyweights such as Naspers, Prosus and Anglo American, which earn a sizeable portion of their revenue in international markets. But stalwart, SA-focused, listed stocks lagged this recovery due to their reliance on the local economy, which contracted the most in 100 years in 2020 and is still struggling to recover from the effects of Covid-19. Shares, such as Pepkor, Cashbuild, Italtile, Astral Foods, AECI and KAP Industrial are “pretty attractively priced” with good earnings prospects over the next three years, said Power.

Financial stocks, including Standard Bank, Absa, Liberty and Momentum, are also trading at discounts of 20%-30% to the intrinsic values assigned to them by Truffle’s analysts, which presents investors with an ideal opportunity to purchase these stocks at attractive valuations, said Power. In the industrial space, Truffle has bought Imperial Holdings, while in the retail arena it rates Woolworths as among the most attractive shares in its sector due to its food business, which Power describes as “best in class”.

The attractive valuations offered by these shares have prompted Truffle to cash out of stocks such as Richemont, while reducing its positions in Anglo American and BHP, as well as Naspers and Prosus, to put that money to work in comparatively undervalued segments of the market.

“We’ve had big exposure to offshore earners in the top 40 for the past four years and have now taken some profits,” said Power. “We still hold them, we just hold less of them.” Truffle also sees “a lot of value” in miners of platinum group metals (PGMs) due to demand outstripping supply following years of underinvestment in SA, which is still the world’s biggest producer of the metals. Listed foodservices group Bidcorp is also a Truffle favourite as it says the counter is likely to benefit due to its exposure to markets such as Australia, New Zealand and the UK, which are far more advanced in their Covid-19 vaccine rollout than SA.

“If you look at the global food-services sector, Bidcorp trades at quite a big discount relative to that universe so we think there’s some nice value in that name,” said Power. The company is “high quality” and it offers very good returns on invested capital, he said.

TO EXTERNALISE MONEY … FROM A COUNTRY RISK AND DIVERSIFICATION POINT OF VIEW IS SENSIBLE, BUT THE QUESTION IS WHERE