Naspers: an ideal in­di­ca­tor

For ev­ery 5% move­ment in its share price, the Top40 will move by about 1%

Financial Mail - Investors Monthly - - Analysis: Technical -

The per­for­mance of the over­all mar­ket this year has been skewed by Naspers. The stock makes up the sin­gle largest weight­ing in the Top40, with a con­tri­bu­tion of about 21% to the weight of the Top40 In­dex. Thus for ev­ery 5% move­ment in the share price of Naspers, the Top40 will move by about 1%.

Naspers’s share price has re­cently run into re­sis­tance on its chart at R2,850. That level rep­re­sents the up­per bound­ary of a chan­nel pat­tern that has been in place for the past two years. It is no­table that the price be­gan to cor­rect at such a mean­ing­ful tech­ni­cal level.

The cor­rec­tion be­gan just af­ter Ten­cent re­leased a stel­lar set of re­sults. Naspers owns a 34% stake in Ten­cent and the value of that stake ac­counts for about 125% of the value of Naspers. (Yes, you read that cor­rectly … 125%. Naspers trades at a sub­stan­tial dis­count to the value of its sum of the parts val­u­a­tion).

Since the Ten­cent re­sults, how­ever, a lot of air in the share price has be­gun to dis­si­pate. One could ar­gue the mar­ket has adopted a “buy the ru­mour, sell the fact” ap­proach to Ten­cent and, con­se­quently, Naspers. There are no ad­di­tional cat­a­lysts in the pipe­line to cre­ate any news flow for Ten­cent, so the mar­ket seems to be tak­ing prof­its and al­low­ing the share prices of the com­pa­nies to re­trace some of the huge gains of the first five months of the year.

This is not an un­com­mon phe­nom­e­non. Share prices don’t go up in a straight line. Sup­ply and de­mand fluc­tu­ates to cre­ate price pat­terns that are of­ten re­peat­able in a chart.

Over the prior two years il­lus­trated in the chart, there have been two oc­ca­sions where the Naspers share price has cor­rected by as much as 25%. All the while the broader out­look for the stock re­mained pos­i­tive. That’s just a func­tion of nor­mal sup­ply and de­mand for the com­pany’s shares.

When a stock trades on a p:e mul­ti­ple of over 100 as was the case re­cently, there is room for volatil­ity when the val­u­a­tion be­gins to ad­just. Based on the chart pat­tern of Naspers — as well as the lack of near-term cat­a­lysts — it looks as if the share price has en­tered a pe­riod of con­sol­i­da­tion that may last a few months.

This won’t al­ter the over­all bullish chart struc­ture. It’s likely to just pro­vide a chance for the share price to re-set at a lower level be­fore the next im­pulse wave to the up­side be­gins. If past his­tory is any guide, don’t be sur­prised if the share price pulls back to the 200-day mov­ing av­er­age at R2,300 or even lower.

Given that Naspers makes up such a big weight­ing in the Top40 in­dex, it is worth­while to an­a­lyse the in­dex to see what the tech­ni­cal struc­ture looks like there. The in­dex has been stuck in a side­ways range for the past three years — 41,500-49,000. In each of the prior two years, the Top40 in­dex formed a head & shoul­ders pat­tern in the first two thirds of the year, be­fore a late sell-off en­sued.

His­tory doesn’t nec­es­sar­ily re­peat it­self, but early in­di­ca­tions sug­gest this year could be the same — par­tic­u­larly if the sce­nario painted for Naspers is cor­rect. If the Top40 breaks be­low the 50-week mov­ing av­er­age at 45,500, then there’s a pos­si­bil­ity of a deeper sell-off in the lat­ter half of the year.

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