ILLIQ­UID AS­SETS

Financial Mail - Investors Monthly - - Contents -

Ob­scure, illiq­uid stocks can bring their own re­ward

Is share illiq­uid­ity a com­plete turn-off, or does the scarcity of mean­ing­ful parcels of scrip present a worth­while op­por­tu­nity for a dogged in­vestor?

The JSE, on the whole, is a highly liq­uid stock mar­ket — at least as re­gards the top 100 listed com­pa­nies. Be­sides, mar­ket reg­u­la­tions th­ese days in­sist on a de­cent free float for any new list­ings on the JSE. Yet there are a good num­ber of older com­pa­nies with share­holder reg­is­ters that don’t sport many hun­dreds of share­hold­ers, and where a few big share­hold­ers have long clutched the bulk of the shares in is­sue.

With an abun­dance of op­por­tu­nity, why should an in­vestor scratch around for lit­tle lines of scrip in what well-known stock­bro­ker David Sylvester de­scribes as “tin pot tid­dly wid­dly” com­pa­nies most of shares are hoarded by one or a hand­ful of share­hold­ers?

Well, a longer look at some of the illiq­uid coun­ters on the JSE might just re­veal a few gems.

It goes with­out say­ing that share liq­uid­ity is key to a com­pany be­ing taken se­ri­ously by in­flu­en­tial in­vestors. In­sti­tu­tions pre­fer to hold shares that are easy to trade.

If share illiq­uid­ity means a lack of par­tic­i­pa­tion by in­sti­tu­tional/pro­fes­sional in­vestors then let’s as­sume seek­ing scarce scrip is largely the domain of the or­di­nary punter. Con­sid­er­ing in­sti­tu­tional share­hold­ers are the main driv­ers of sen­ti­ment on the JSE, it could be said that a com­pany with a small free float falls into a kind of twi­light zone where main­stream mar­ket forces are ab­sent. That’s not far­fetched. But lack of in­sti­tu­tional in­ter­est some­times of­fers a re­tail in­vestor an op­por­tu­nity. There’s the rare chance for own anal­y­sis in coun­ters not of­fi­cially re­searched by the as­set man­age­ment com­mu­nity, as well as am­ple op­por­tu­nity to take ad­van­tage of any per­ceived price anom­alies.

There are a num­ber of ex­am­ples where re­tail in­vestors’ for­ti­tude in crunch­ing num­bers and delv­ing into strat­egy paid off. Lo­gis­tics spe­cial­ist San­tova and fi­nan­cial ser­vices con­glom­er­ate Fin­bond, both not the most illiq­uid shares on the JSE, watched their share prices leap ahead in the past two years as in­vestors cot­toned on to the mer­its of their re­vised busi­ness strate­gies. In­sti­tu­tional in­vestor par­tic­i­pa­tion was min­i­mal, most of the run­ning was done by pri­vate in­vestors.

Ar­guably some of the big­gest re­wards from delv­ing into ob­scure, illiq­uid stocks have come from com­pany trans­for­ma­tions — re­mem­ber­ing that rad­i­cal cor­po­rate ac­tions like re­verse takeovers and changes in con­trol are of­ten eas­ier to ex­e­cute in a com­pany with one or two large share­hold­ers and a limited num­ber of mi­nor­ity share­hold­ers.

Back in 1995 not many pun­ters would have glanced side­ways at low-key and scarcely traded per­son­nel place­ment counter PAG. But Jan­nie Mou­ton did, and used the un­der­val­ued com­pany as a plat­form to build the highly suc­cess­ful in­vest­ment house, PSG Group.

In the late 1990s strug­gling fruit farm­ing busi­ness WB Hold­ings, which se­ri­ously lacked mar­ket in­ter­est, sold off its ap­ple and plum or­chards and was bought out by well-known busi­ness­men Motty Sacks (ex Net­care) and Meyer Kahn (ex SABMiller). The WBH shell was used to build up in­vest­ment com­pany Afrocentric, which has carved out a lu­cra­tive niche in the broader med­i­cal sec­tor.

There are other in­spi­ra­tional ex­am­ples: Glo­d­ina went from a hung-out-to-dry towel man­u­fac­turer to a po­tent industrial con­glom­er­ate in the form of KAP Industrial — thanks to the ef­forts of mer­cu­rial Ger­man in­vestor Claas Daun and later Stein­hoff In­ter­na­tional’s prime mover, Markus Jooste.

IMR, which was a left­over from the de­funct Ap­ple­ton

It would be re­miss not to men­tion that many illiq­uid stocks sim­ply fiz­zle out

Pic­ture: THINKSTOCK

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