Buyers’ market for some
MANY STOCKS HAVE FALLEN OFF THE RADAR
For the seven months to end July, the FTSE/JSE All Share Index was up 10.6%. This recovery was hardly broad based. Perpetua chief investment officer Delphine Govender explains we’ve had a highly concentrated source of return: almost entirely from Naspers, with a little from Richemont, Bidcorp and Shoprite. The number of stocks down this year is far higher than those up.
Globally, a very small group of high-growth stocks is leading markets higher and lifting priceto-earnings (P/E) multiples. The JSE’s trading on a P/E of around 20 times; the S&P 500’s offering a P/E of over 24 times.
Overall, this makes them look quite richly priced, but value investors see something different.
“Because the pendulum has swung so far in favour of these few counters, there are a lot of other stocks that have fallen off the radar,” says Govender.
So there’s a far wider opportunity set for value investors. These cheaper stocks aren’t concentrated in a single sector, or exclusively lower-quality cyclical counters.
“As things stand, you don’t have to compromise that much on quality to find cheap stocks,” says 27Four investment analyst Nadir Thokan.
Hospital groups are a good example. They’re usually considered solid, defensive plays, but Life Healthcare, MediClinic and Netcare are all down 23-36% over the last year. Life is offering a dividend yield of over 5% on a forward P/E of under 18.
A number of other stocks – heavily in favour 24 months ago – have pulled back, including Aspen Pharmacare, Remgro and Brait, all down sharply in the past year.
The big four local banks also offer interesting potential. Though recovered from their heavy selloff after Nenegate, none are back to their mid-2015 highs.
They haven’t delivered outstanding earnings, but they’ve been far from poor.
Their credit loss ratios are going down, not up, which Thokan says shows they aren’t extending poor-quality credit
He sees many other opportunities in mid-caps too, especially those starting to generate good profits overseas.
Ascendis is increasing its offshore earnings in a very smart way, not adding international businesses just for the sake of it.
AECI now generates about 35% of its earnings outside SA and looks to grow that to 50%.
“These are also high-quality offshore earnings. And those offshore earnings are growing. They also have a good quality management team with a high degree of ownership, and over the long term that means that capital allocation decisions are likely to be disciplined,” Thokan says, adding that is what drives earnings growth and long-term equity returns.
The diversity of these companies shows how much opportunity there is for value investors willing to take a longer-term view.