Financial Mail - Investors Monthly
ILLIQUID ASSETS
Obscure, illiquid stocks can bring their own reward
Is share illiquidity a complete turn-off, or does the scarcity of meaningful parcels of scrip present a worthwhile opportunity for a dogged investor?
The JSE, on the whole, is a highly liquid stock market — at least as regards the top 100 listed companies. Besides, market regulations these days insist on a decent free float for any new listings on the JSE. Yet there are a good number of older companies with shareholder registers that don’t sport many hundreds of shareholders, and where a few big shareholders have long clutched the bulk of the shares in issue.
With an abundance of opportunity, why should an investor scratch around for little lines of scrip in what well-known stockbroker David Sylvester describes as “tin pot tiddly widdly” companies most of shares are hoarded by one or a handful of shareholders?
Well, a longer look at some of the illiquid counters on the JSE might just reveal a few gems.
It goes without saying that share liquidity is key to a company being taken seriously by influential investors. Institutions prefer to hold shares that are easy to trade.
If share illiquidity means a lack of participation by institutional/professional investors then let’s assume seeking scarce scrip is largely the domain of the ordinary punter. Considering institutional shareholders are the main drivers of sentiment on the JSE, it could be said that a company with a small free float falls into a kind of twilight zone where mainstream market forces are absent. That’s not farfetched. But lack of institutional interest sometimes offers a retail investor an opportunity. There’s the rare chance for own analysis in counters not officially researched by the asset management community, as well as ample opportunity to take advantage of any perceived price anomalies.
There are a number of examples where retail investors’ fortitude in crunching numbers and delving into strategy paid off. Logistics specialist Santova and financial services conglomerate Finbond, both not the most illiquid shares on the JSE, watched their share prices leap ahead in the past two years as investors cottoned on to the merits of their revised business strategies. Institutional investor participation was minimal, most of the running was done by private investors.
Arguably some of the biggest rewards from delving into obscure, illiquid stocks have come from company transformations — remembering that radical corporate actions like reverse takeovers and changes in control are often easier to execute in a company with one or two large shareholders and a limited number of minority shareholders.
Back in 1995 not many punters would have glanced sideways at low-key and scarcely traded personnel placement counter PAG. But Jannie Mouton did, and used the undervalued company as a platform to build the highly successful investment house, PSG Group.
In the late 1990s struggling fruit farming business WB Holdings, which seriously lacked market interest, sold off its apple and plum orchards and was bought out by well-known businessmen Motty Sacks (ex Netcare) and Meyer Kahn (ex SABMiller). The WBH shell was used to build up investment company Afrocentric, which has carved out a lucrative niche in the broader medical sector.
There are other inspirational examples: Glodina went from a hung-out-to-dry towel manufacturer to a potent industrial conglomerate in the form of KAP Industrial — thanks to the efforts of mercurial German investor Claas Daun and later Steinhoff International’s prime mover, Markus Jooste.
IMR, which was a leftover from the defunct Appleton
It would be remiss not to mention that many illiquid stocks simply fizzle out