It’s sale sea­son on the JSE

With lo­cally listed com­pa­nies tak­ing a beat­ing in the cur­rent eco­nomic cli­mate, var­i­ous stocks might be on of­fer at a dis­count. But it is im­por­tant to know that some of them might not make it out of ICU alive.

Finweek English Edition - - Contents - By Si­mon Brown

re­cently, in a tweet, Del­phine Goven­der from Per­petua re­ferred to many of our lo­cally listed stocks as be­ing in “earn­ings ICU”. She is cor­rect. Re­sults com­ing out for the JSE-listed stocks are bleak. Aspen, for ex­am­ple, now states that its core busi­nesses, com­pris­ing some three-quar­ters of rev­enue, will see or­ganic growth of only 1% to 4%. And Sho­prite* saw head­line earn­ings per share (HEPS) drop for the first time in over a decade.

This should not come as any sur­prise – 2018 has been a tough year for con­sumers, with a VAT in­crease, fuel prices con­tin­u­ally ris­ing and a tech­ni­cal re­ces­sion to boot.

All of this comes off the back of hefty per­sonal tax in­creases in pre­vi­ous years.

But this is also an op­por­tu­nity for in­vestors. The JSE is hav­ing a sale and we’re in­vited to par­take. The ques­tion is: which stocks will be dis­charged from ICU and which won’t?

All of this also plays into my col­umn in the last is­sue (“What goes up, must come down”, 27 Septem­ber) about the im­pend­ing bear. Re­mem­ber, I said we should not worry about the bear. It will come and we will sur­vive.

Im­por­tantly, as with all sales, we need to be dis­ci­plined.

First of all, we need to recog­nise what is hap­pen­ing.

Typ­i­cally, we tend to love a stock that is fly­ing, but we don’t own it be­cause it al­ways seemed ex­pen­sive. So we never got on board. We tell our­selves that as soon as we see a dip in price, we’ll start buy­ing. Then it re­traces and we get cold feet. This is not a base­less fear, as demon­strated by both MTN and Aspen. The phar­ma­ceu­ti­cals maker hit R440, but is now un­der R180. MTN, once R260, now trades be­low R80.

How­ever, these two ex­am­ples (and many oth­ers) are not a fair re­flec­tion. Both these stocks are in a chang­ing en­vi­ron­ment. Aspen is ma­tur­ing to a largely ex-growth com­pany, and MTN is in an in­dus­try with fall­ing prices and reg­u­la­tory is­sues (of­ten of its own mak­ing).

What I want to talk about here are bell­wether sta­ble and bor­ing stocks that chug along – in the olden days we’d have called them blue chips. Sure, they have hit a pot­hole in the road, but it’s just a punc­ture, not a write-off.

The stocks I am look­ing for are con­sumer sta­ples and dis­cre­tionary. They are non-cycli­cal, with solid bar­ri­ers to en­try.

One of the ex­am­ples men­tioned above is Sho­prite (and other food re­tail­ers, but Sho­prite is head-and-shoul­ders above the rest and my pre­ferred op­tion). We can also add Bid­vest, Growth­point, Hyprop, Fa­mous Brands* (still suf­fer­ing in­di­ges­tion from its UK burger out­ing) and oth­ers. You’ll have your own list and it’s time to start per­fect­ing it.

In all of these stocks an im­prov­ing econ­omy will see their prof­its start to in­crease as the con­sumer starts spend­ing again.

The is­sue is whether the econ­omy will im­prove. Cer­tainly it will. It may take time, maybe a lot of time. But if your view is that the lo­cal econ­omy will never re­cover and that our fu­ture will fol­low the path of Zim­babwe, Ar­gentina or Venezuela, then you should be buy­ing a plane ticket rather than lo­cal stocks.

The fact that we don’t know when things will get bet­ter gives us time – we don’t need to rush in. We can place some cheeky bids at lower prices for stocks we like.

We can slowly build po­si­tions (or add to them) us­ing any weak­ness to buy more. There is no rush at this sale. But also re­mem­ber that no sale lasts for­ever, so don’t try and fig­ure out the ab­so­lute bot­tom. De­cide what stocks you like – and at what prices – and pa­tiently use this weak­ness to build a high-qual­ity port­fo­lio at great prices. ■ ed­i­to­rial@fin­

*The writer owns shares in Sho­prite and Fa­mous Brands.

The stocks I am

look­ing for are con­sumer sta­ples and dis­cre­tionary. They are non­cycli­cal, with solid bar­ri­ers to en­try.

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