Un­cle Sam wants you

Time to buy cheap Amer­i­can shares

Finweek English Edition - - MONEYCLINIC -

ONE OF THE MOST pop­u­lar rec­om­men­da­tions cur­rently do­ing the rounds in South Africa’s in­vest­ment com­mu­nity is to buy United States shares, es­pe­cially Microsoft. There’s a lot of logic in this ar­gu­ment, which is based on the fol­low­ing as­sump­tions: Share prices in the BRICS coun­tries (SA is now the “S”) in­creased con­sid­er­ably over the past two years while share prices in the old world – of which the US and Ja­pan are now the lead­ing mem­bers – haven’t even re­turned to the level of 10 years ago.

Nev­er­the­less, many of the big guns in the US in fact earn a large por­tion of their in­come in the BRICS coun­tries, so they should also share in the rapid eco­nomic growth of the new world.

How­ever, the most im­por­tant ar­gu­ment is that the val­u­a­tion of US shares is much more at­trac­tive than even those on the JSE. In the in­vest­ment world, “val­u­a­tion” means the earn­ings mul­ti­ple at which a share is trad­ing. Take Microsoft as an ex­am­ple. An­a­lysts fore­cast this gi­ant or­gan­i­sa­tion will earn US$255c/share (US cents) in its cur­rent fi­nan­cial year. The share is cur­rently trad­ing at $2620c. That gives a mul­ti­ple of just more than 10 (2620c/255c). To put it in even sim­pler terms, its share price is equal to 10 times the ex­pected profit for the fol­low­ing year. That’s cheap or – switch­ing back to in­vest­ment jar­gon – it’s a very at­trac­tive val­u­a­tion.

Ten years ago Microsoft was trad­ing at an earn­ings mul­ti­ple of more than 40, the an­a­lysts point out. In fact, in De­cem­ber 1999 – when the share reached a record price (ad­justed to al­low for sub­di­vi­sions) of $58 – the then earn­ings mul­ti­ple was closer to 100. At that time the Nas­daq in­dex was way above 5000. The cur­rent level at 2800 is just over 50% of the pre­vi­ous peak. Microsoft’s cur­rent share price hasn’t even reached 50% of its pre­vi­ous peak but even so it’s sus­tained a steady growth in profit over the 10 years.

Microsoft’s val­u­a­tion ra­tio of 10 can be com­pared with the be­tween 15,5 and 14 (his­tor­i­cal and fu­ture profit) at which the JSE All Share In­dex is cur­rently trad­ing.

In­ter­na­tion­ally, in­vest­ment an­a­lysts also think Microsoft is cur­rently a good buy and give the share a rat­ing of 1,9. In their scale 1 equals a per­fect buy­ing op­por­tu­nity and 5 equals a per­fect sell­ing op­por­tu­nity.

The three in­ter­na­tional gi­ants listed on our own doorstep, the JSE – BHP Bil­li­ton, Bri­tish Amer­i­can To­bacco and SAB­Miller – are cur­rently rated be­tween 2 and 2,2 by the an­a­lysts. That’s slightly weaker than for Microsoft.

Okay, Microsoft is a good buy, so what next? Marzél Stadler, of PSG Kon­sult in Pre­to­ria East – where, in­ci­den­tally, the Microsoft fever is run­ning high – has drawn up a handy short guide for in­vestors who’d like to buy Microsoft now. For a start, re­mem­ber ev­ery South African is cur­rently en­ti­tled to take R4m/year out of the coun­try. You can take that out legally if your af­fairs are in or­der with the SA Rev­enue Ser­vice. You need a cer­tifi­cate from Sars be­fore you can do so.

The next step is to open an ac­count with a bro­ker off­shore and to trans­fer your money there.

PSG makes things a bit eas­ier for its clients. It has also es­tab­lished an in­ter­na­tional broking divi­sion – called PSG Kon­sult Bro­kers (UK) – and its bank ac­count is with Bar­clays plc. All you have to do af­ter sat­is­fy­ing Sars is to open your own bank ac­count with Bar­clays. Af­ter that, PSG will help you to place your money with

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