The ULTIMATE growth share
Some stalwarts don’t shape
THE ULTIMATE GROWTH stock is more than just a myth. In the United States, Google is in the process of taking over the mantle that’s long been over the shoulders of Genentech. In South Africa, shares in the telecommunications, media and technology (TMT) sectors have for some time been displacing the country’s shares in the traditional mining and financial sectors as the top growth stocks. And SA’s ultimate growth stock will probably also be found in those sectors.
After considerable elimination in our search for those special shares with unlimited opportunities reaching for the so-called “blue sky” we singled out two as leading growth stocks: MTN and Naspers. The latter, after its successful recent rights issue aimed specifically at obtaining cash for expansion in emerging industries and markets, leads by a short head.
The choice might seem strange, since Naspers owns Finweek. However, don’t lose sight of the fact that in the past I haven’t hesitated to criticise Naspers: for example, when it became involved in OpenTV, the US miracle from which we yet have to see any major results. Naspers at times obstinately and blindly defended that investment, even when the price of OpenTV plummeted from US$250 to $7/share. Fortunately, the company eventually decided to sell that investment.
And I’ve also not been slow in the past in showing up Naspers’s poor management with regard to foreign exchange risks. That, for example, resulted in M-Net/SuperSport becoming technically insolvent, because all forex liabilities in so-called strong currencies were slavishly covered 24 months in advance – even when the rand was as weak as US$1/ R12. That was simply sloppy management of foreign exchange risk.
Since the darkest days in 2002 – when Naspers’s price fell to 1 245c/share – the company has reasserted itself. It’s still a strong magazine and newspaper publisher and the important role that this division (Media24) plays in its stability has been rediscovered.
Ordinary pay TV is a major contributor to cash flow and should be nurtured. OpenTV’s current share price of $2,41, three years after Naspers sold it at $7/share, perhaps tells how misplaced that confidence was at the time.
Motley Fool, America’s popular Internet investment adviser (despite the name, a very serious player), relies slavishly on the discounting of future cash flow in its search for the so-called perfect buy-and-hold share and the ultimate growth stock.
Finding the latter means finding a company that generates and can generate both current and future cash flow. On the extent of the future cash flow there must be little, if any, limitation. That explains the “blue sky” in the search for this ultimate growth stock.
With that as the benchmark, US investors
gave their full backing to Genentech as the ultimate growth stock a few years ago. The company’s code on Wall Street – DNA – describes its activities in the biomedical industry and also explains why it has long been the US’s favourite growth stock.
A quick look at the group’s latest financial statements reveals an impressive scorecard called “Objectives for 2010”. One of those is to generate free cash flow of $12bn (around R88bn) by 2010, compared with the mere $1bn (R7,30bn) achieved last year.
That’s part of the reason why Motley Fool’s “number cruncher” regularly spits that company out as the ultimate growth stock. Incidentally, SA companies could take a look at Genentech’s 2010 scorecard and compile similar ones themselves.
However, Genentech’s share price over the past 18 months hasn’t managed to reflect its status as the ultimate growth stock – and that’s why investors are shifting their attention to Google. That share has increased its price by more than 360% since listing in third quarter 2004 and opportunities for the company abound.
Thomas B Rilley, executive director of the Centre for Electronic Governance, recently described the challenges of the concept of knowledge economy as follows: “The only comparative advantage a company will enjoy will be its process of innovation and its ability to derive value from information. We’re now an information society in a knowledge economy.”
I relied heavily on that concept when eliminating sectors and shares that don’t comply with the requirements of an ultimate growth stock.
The first sector that must be eliminated is the traditional mining industry, led by gold, on which the SA economy was originally built. Gold production in SA has reached its sunset days. The platinum trio – Amplats, Implats and newcomer Aquarius – have fared brilliantly over the past two years and recorded incredible share price increases of between 100% and 400%. Nevertheless, mining – with its declining reserves and limited new technological development in mining and refining the final product – can’t benefit much from the new knowledge economy’s technological development. The same goes for Sasol.
But somewhere there’s a company like sxr Uranium One that, despite the nearly unprecedented increase in its share price over the past year – largely as a result of the demand for uranium – could be a huge growth stock, because it’s in the right sector.
SA’s financial sector has overdeveloped itself in our economy and the challenges there are, as Absa did, to find a large international partner or, as Standard Bank is doing, to focus on other emerging markets.
Investec plc has proved that it can compete well in the heart of London’s financial district, but it’s not likely to catch up with or take over one of the world giants, such as JP Morgan or HSBC.
SABMiller and Richemont were also on my screen for a while as possible perfect growth stocks, but in both cases they lack that charm of innovation and playing around in the knowledge economy. Both are probably perfect buy-and-hold shares.
The drive and passion of an entrepreneur still actively involved in his own business often makes the company a huge growth stock. Two examples are certainly Bill Gates and his great friend Warren Buffett, who are both actively involved in their respective winners, Microsoft and Berkshire Hathaway. But you wonder what the future holds for both of them and whether their successors will show the
Both those shares are probably excellent buy-and-hold opportunities and, especially in the case of Berkshire, there must be enormous opportunities to unlock value after the final and inevitable retirement of the almost 80-year-old Buffett. But it still doesn’t hold the promise of “blue sky” that Google and Genentech do.
For the same reason I eliminated top SA shares such as Bidvest, Imperial, the Altech group, Steinhoff and a few others as candidates for the ultimate growth stock. Once again, they aren’t bad investments and they certainly belong in any good portfolio.
SA’s retailers remain an attractive group, especially if they focus on the enormous potential in the local market. But it’s also a fact that few retail models last for long, as our well-known old OK Bazaars and Greatermans showed a long time ago.
The new focus on credit extension and the accompanying practices, along with the expected increase in interest rates, bring a few dark clouds on to the once blue sky of quite a number of such companies. Nevertheless, I couldn’t avoid including Massmart and Mr Price on my short list as two that are nearly perfect growth stocks.
That brings us to SA’s TMT sector, in which one T – technology – is fairly unimpressive. A few years ago, Dimension Data – which at one stage was the third-largest company on the JSE – would easily have made it to the short list of perfect growth stocks, but its business model has since failed the test.
SA’s retailers remain an attractive group, especially
if they focus on the enormous potential in the
The leaders in the TMT sector – MTN (six), Telkom (14) and Naspers (18) – have over the past few years taken up important positions in the rankings of companies with the largest market capitalisation on the JSE. With all three among the top 20 – while 10 years ago relatively little was known about them – it’s clear that SA’s ultimate growth
stock must be found in that sector.
MTN was the share over the past five years and it’s difficult not to place it top of the list again. The graph for Naspers and MTN over the past seven years shows only one winner for that period. But Naspers’s remarkable recovery over the past three years overshadows even MTN’s ongoing growth.
The ease with which Naspers recently acquired R7,4bn of new capital from its shareholders through a rights issue confirms investors’ confidence that this company will make the right investments in future in what’s broadly known as the knowledge economy.
In the US, independent adviser Travis Johnson recently summed up Naspers’s potential in three research reports by calling it “a nice, global business mix”. He identified the growth opportunities in Media24 and MultiChoice (pay TV), the group’s two solid foundations, in SA.
He mentioned the group’s Internet successes and pointed out that Naspers’s effective 36% interest in Tencent, China’s popular QQ.com and one of the world’s largest well-known brands, is currently worth $2bn – around 25% of Naspers’s total market cap.
Johnson also liked the group’s plans in Brazil. Russia and Thailand, which, along with its exposure in China, expands its presence in the world to at least three of the popular so-called BRIC countries (Brazil, Russia, India and China).
More information on Johnson’s research and views on Naspers, as well as other growth opportunities in the knowledge, communications and information environment, are available on his website, seekingalpha.com. His views on Naspers from an American viewpoint definitely put the company in a new perspective as an important emerging player in the world’s communications and knowledge economy.
So that explains my choice of Naspers as the ultimate growth stock on the JSE.
Neal Froneman, sxr Uranium One CEO
Alastair McArthur, Mr Price CEO
NASPERS AND MTN... TWO TEN BAGGERSGGERS COMPETING FOR HONOUR
GOOGLE, GENENTECH... ULTIMATE