Naspers: an ideal indicator

For every 5% movement in its share price, the Top40 will move by about 1%

The performance of the overall market this year has been skewed by Naspers. The stock makes up the single largest weighting in the Top40, with a contribution of about 21% to the weight of the Top40 Index. Thus for every 5% movement in the share price of Naspers, the Top40 will move by about 1%.

Naspers’s share price has recently run into resistance on its chart at R2,850. That level represents the upper boundary of a channel pattern that has been in place for the past two years. It is notable that the price began to correct at such a meaningful technical level.

The correction began just after Tencent released a stellar set of results. Naspers owns a 34% stake in Tencent and the value of that stake accounts for about 125% of the value of Naspers. (Yes, you read that correctly … 125%. Naspers trades at a substantial discount to the value of its sum of the parts valuation).

Since the Tencent results, however, a lot of air in the share price has begun to dissipate. One could argue the market has adopted a “buy the rumour, sell the fact” approach to Tencent and, consequently, Naspers. There are no additional catalysts in the pipeline to create any news flow for Tencent, so the market seems to be taking profits and allowing the share prices of the companies to retrace some of the huge gains of the first five months of the year.

This is not an uncommon phenomenon. Share prices don’t go up in a straight line. Supply and demand fluctuates to create price patterns that are often repeatable in a chart.

Over the prior two years illustrated in the chart, there have been two occasions where the Naspers share price has corrected by as much as 25%. All the while the broader outlook for the stock remained positive. That’s just a function of normal supply and demand for the company’s shares.

When a stock trades on a p:e multiple of over 100 as was the case recently, there is room for volatility when the valuation begins to adjust. Based on the chart pattern of Naspers — as well as the lack of near-term catalysts — it looks as if the share price has entered a period of consolidation that may last a few months.

This won’t alter the overall bullish chart structure. It’s likely to just provide a chance for the share price to re-set at a lower level before the next impulse wave to the upside begins. If past history is any guide, don’t be surprised if the share price pulls back to the 200-day moving average at R2,300 or even lower.

Given that Naspers makes up such a big weighting in the Top40 index, it is worthwhile to analyse the index to see what the technical structure looks like there. The index has been stuck in a sideways range for the past three years — 41,500-49,000. In each of the prior two years, the Top40 index formed a head & shoulders pattern in the first two thirds of the year, before a late sell-off ensued.

History doesn’t necessarily repeat itself, but early indications suggest this year could be the same — particularly if the scenario painted for Naspers is correct. If the Top40 breaks below the 50-week moving average at 45,500, then there’s a possibility of a deeper sell-off in the latter half of the year.