How to weed out un­de­sir­able sec­tors A quick way to elim­i­nate a large chunk of JSE-listed stocks as potential in­vest­ments is to re­move en­tire sec­tors that are less than stel­lar from the equa­tion.

Finweek English Edition - - MARKETPLACE -

there­are some 500 shares on the JSE, but I only want to in­vest in about 10 to 12 of them. As I have writ­ten many times be­fore, I only want the ab­so­lute best of the best. No sec­ond best, no maybes, only the proven best in their re­spec­tive in­dus­tries.

As an­a­lyst Jean Pierre Ver­ster (for­merly of 36One, cur­rently on gar­den­ing leave af­ter re­sign­ing in May) once said to me: “Just be­cause a stock is listed does not mean you need to own it.” He’s right, ab­so­lutely right. My process of stock se­lec­tion is ac­tu­ally more about find­ing in­dus­tries and stocks to avoid. If I can de­cide that an en­tire in­dus­try is just not in­vest­ment grade (by my re­quire­ments of qual­ity), then my work­load is re­duced. So for me a large part of the in­vest­ment process is to start with look­ing for rea­sons not to even bother with an in­dus­try.

Know­ing that I want to avoid a sec­tor means I don’t have to spend time look­ing at the in­di­vid­ual stocks within that sec­tor, which gives me more time to fo­cus on win­ning stocks and in­dus­tries. This is im­por­tant – we’re part-time in­vestors and don’t have the lux­ury of spend­ing all our time re­search­ing potential in­vest­ments.

So how do you iden­tify these sec­tors

broadly it stands. Con­struc­tion com­pa­nies have only price as their edge and that re­sults in a race to the bottom that sees them slash­ing profit mar­gins. There is noth­ing at­trac­tive about that and that’s why I stay well away from the in­dus­try. An­other is­sue I look at is leg­isla­tive risk. Is there a dan­ger that gov­ern­ment will change the play­ing field and threaten prof­its?

Here the in­dus­try to look at is health­care. This is a boom­ing space as we hu­mans con­tinue to live longer and longer. We’re also able to cure more ail­ments and ill­nesses and to­day con­sumers have more wealth to pay for treat­ment. Add in reg­u­la­tions that make be­com­ing a health­care provider a long, com­pli­cated and ex­pen­sive process, and on the sur­face health­care is an ex­cel­lent space to op­er­ate in. Fur­ther, health­care is not some­thing the av­er­age per­son will skimp on and if you’re sick you’re very likely to do some­thing about it.

What’s not to love? Leg­isla­tive risk, that’s what. Health­care costs that have been ris­ing well above in­fla­tion, which is of con­cern to gov­ern­ments around the world.

We’ve al­ready seen sin­gle-exit pric­ing in the phar­macy sec­tor locally and we’re likely to see more crack­downs on health­care costs across the world. Hence the only space you’d want to look at in health­care is generic drugs and drug dis­tri­bu­tion (and maybe re­tail). Aspen is hence the nat­u­ral choice for fur­ther dig­ging, as is Clicks, with its in-store phar­ma­cies and UDP drug dis­tri­bu­tion busi­ness, while Dis­cov­ery* is a com­pany that would ac­tu­ally ben­e­fit from lower health­care costs.

“Just be­cause a stock is listed does not mean you need to own it.”

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.