Two savvy JSE finds

OUT OF FAVOUR: WOOLWORTHS, GLENCORE NOT IN INVESTORS’ GOOD BOOKS But solid and at current share prices, seem to present interesting opportunities.

At the end of October 2015, Woolworths was one of the most-loved stocks on the JSE. In a little over seven years, its price climbed from under R10 per share to close to R105 a share.

Since then, however, the stock has slid to its current levels of about R52 per share. From being a market darling just 22 months ago, the retailer has quickly fallen out of favour.

Glencore is another local large cap that isn’t in investors’ good books at the moment.

Questions about its operations in the Democratic Republic of Congo (DRC) and news that the US department of justice is investigating it under the Foreign Corrupt Practices Act have made the market wary.

For value investors, however, these two stocks may present interesting opportunities. As Schroders fund manager Nick Kirrage told the Allan Gray Investment Summit this week:

“Value investing is doing the thing that sucks – the thing that makes you uncomfortable. Like many things in life, such as going to the gym, the hard thing tends to be the rewarding thing. As value investors, we look for the thing that feels uncomfortable.”

Woolworths and Glencore fit this description. The question for investors is whether the potential risk-reward payoff on these stocks is now in their favour.

Woolworths

Chief investment officer at Perpetua Investment Managers Delphine Govender believes Woolworths represents “a classic value investment”. It is currently the third-largest holding in the Perpetua SCI Equity Fund.

“It’s a fundamentally goodquality business that has an enduring business operation in South Africa that is not going away,” Govender said. “It doesn’t matter who the president is or whether Amazon comes here, they have a strong moat.”

The company did, however, bring its own pain about through the buyout of David Jones.

“They overpaid dramatically for an asset in Australia in a declining business model, then promised synergies that never came,” Govender pointed out. Woolworths’ top-line growth has been severely affected because of the David Jones purchase, but Govender argued the South African business is stronger than many people believe. She believes the market has punished the share because it is obsessed with shortterm numbers.

“We think Woolworths is fundamentally undervalued on quite benign assumptions,” she said. “It’s one of those neglected stocks right now because you can’t see the earnings for the next six months.”

Over the long term, however, Govender believes these issues will work their way out.

Glencore

Glencore’s problems are different to those at Woolworths. Karl Leinberger, the chief investment officer at Coronation, said their funds sold out of the company towards the end of last year due to the issues it was facing.

“I don’t, however, think it’s an uninvestible company,” he said. “But there is no doubt there are cockroaches in the kitchen.”

The local asset manager with the largest holding in the stock is Allan Gray. Chief investment officer Andrew Lapping acknowledges there are problems, but believes the negative sentiment is overdone.

“You don’t get opportunities like this for free,” he noted. “There are a few things going on with Glencore but if you look at its free cash flow through the cycle, it is an extremely attractive opportunity.”

He pointed out that only 13% of the company’s profits come from the DRC and that they have addressed the US department of justice investigation with the company.

“We have spoken to senior management and members of the board at length, and we are quite comfortable with the risks,” Lapping said. “There are always risks in investing. It’s about risks and opportunities.”

There’s no doubt there are cockroaches in the kitchen.