A recipe for pre­serves with­out a rush or a crash

Financial Mail - Investors Monthly - - Editor’s Note - MARC HASENFUSS email Marc on Hasen­fussM@times­me­dia.co.za

I’VE GIVEN UP SUGAR . . . 26 days (at the time of writ­ing) and count­ing. The im­pact on the house­hold gro­cery bill is re­mark­able, and might well ex­plain the weak­ness in Wool­worths’ share price.

What I haven’t quite given up just yet is my be­lief that South African com­pa­nies are a tough breed, and there are still JSE coun­ters mostly fo­cused on the lo­cal econ­omy that will thrive.

It’s clear from re­cent cor­re­spon­dence that a good num­ber of re­tail in­vestors are in two minds about bail­ing or buy­ing into shares that trade at heav­ily dis­counted lev­els un­der the broader SA Inc.

Sen­ti­ment does get rat­tled when mar­gins at in­dus­trial stal­warts such as Nampak, Aveng, PPC and In­victa ap­pear to be buck­ling. Even nim­ble and freshly cap­i­talised con­tenders such as Torre are find­ing trad­ing con­di­tions a grind.

Sen­ti­ment does ap­pear to be aw­fully brit­tle, which makes it dan­ger­ous to try to call the bot­tom on pop­u­lar coun­ters.

Per­son­ally, I’d prob­a­bly not want to delve into any of these coun­ters at this del­i­cate junc­ture. Though there ap­pears to be fun­da­men­tal value, there is a per­vad­ing de­spon­dence in the mar­ket that could push these prices even lower.

That said, there are more than a hand­ful of South African-fo­cused shares that I would not be too un­com­fort­able in­vest­ing in at cur­rent lev­els.

In fact, I’d be happy to of­fer up a 10-strong port­fo­lio that can be as­sessed again in the last edi­tion of the year.

The com­mon char­ac­ter­is­tics would be strong (in some instances “un­der­rated”) man­age­ment, a sound value propo­si­tion, a niche that’s able to sus­tain prof­its (and cash flow) or con­vinc­ing re­cov­ery prospects.

My steady ed­dies would be build­ing sup­plies spe­cial­ist Afrimat (dis­clo­sure: I own a few hun­dred shares), pack­ag­ing group Transpaco and Metro­file. The com­mon char­ac­ter­is­tics would be strong man­age­ment, re­li­able cash flows and the abil­ity to tap sweet spots in the econ­omy.

My X-fac­tor stocks would be fi­nan­cial ser­vices coun­ters Syg­nia (yup, I own a few) and Pur­ple Cap­i­tal — both coun­ters that are po­ten­tial game chang­ers in the broader wealth man­age­ment seg­ment.

My deep value pick would be di­a­mond group Trans Hex, whose share price mostly re­flects the cash value of the com­pany and prac­ti­cally writes off the op­er­a­tions.

My quar­tet of re­cov­ery stocks would be a con­struc­tion-aligned pair­ing of Esor (see Fifi Peters’ anal­y­sis on page 30) and claddings spe­cial­ist Ma­zor cou­pled with the poul­try pair­ing of Sov­er­eign Food In­vest­ments and Quan­tum Foods. All four coun­ters are fac­ing up to harsh trad­ing con­di­tions, but have the bal­ance sheets, busi­ness mod­els and man­age­ment strength to not only sur­vive but thrive when the re­spec­tive cy­cles turn.

We’ll re­visit these picks in six months, and I prom­ise I won’t try to sugar-coat the out­come.

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