Technical Study: Pessimism still rules
But for value investors this can be a time to pick up bargains.
it is often claimed that the best opportunities occur on a stock exchange when things seem to be at their worst. Astute value investors in particular do well at times like these as good companies can become available at low prices and all the investors have to do is be patient until the underlying values of the companies are brought to bear.
Although pessimism is rampant at the moment, this past month saw some strengthening with 33% of the 100 largest market cap companies lying above their 200-day exponential moving averages (EMAs) compared to 28% a month ago. Commodities are still the best-performing stocks. Among the top 10 there is only one industrial share, the successful Bidcorp, which accommodates the foreign food interests of the old Bidvest and operates in 34 countries on five continents.
One method of finding tomorrow’s winners is to look at those shares that can reach new highs in the midst of weak market conditions. This requires strong buying pressure, which in South Africa means that large institutions must support these shares to such an extent that they trigger a firm uptrend. It is institutions with their enormous cash flows that determine the prices of the larger shares in contrast to individual investors who tend to rather focus on smaller shares, in which there is currently little interest.
Two prominent companies among the top 10 at the moment that meet these criteria are Sasol (still the strongest share on the JSE when measured in terms of the difference between its price and its 200-day EMA) and Mondi.
The latter reached new highs in the midst of a depressed market and has increased by about 48% since February before experiencing a mild correction. Since its current bull market began in 2012 the stock, in spite of experiencing two or three major corrections, rewarded its shareholders with a price increase of more than 600%. Last year it also pleased everybody with a special dividend of 100c (in €), which is usually a sign of a healthy cash flow.
The reasons for the buying interest is therefore obvious and confirms the old adage that the shares of a company with growing profits and dividends, and with good prospects, will always be supported by wellinformed investors.
Mondi is a packaging group that is listed on the JSE and in London and which recently once again delivered excellent results. A factor that plays an important role in its success is that it has a clear strategy to focus on high-end paper-based products
– in contrast to Nampak, which has battled many crises. The degree to which its management has succeeded is evident from its return on capital employed over the past five years, which rose from 13.6% to 19.7%. In its financial year to December 2017, Western Europe accounted for 38% of its income, Eastern Europe 22%, North America 11%, Russia 10% and SA only 9%. An interesting windfall that could benefit the company going forward is the growing global aversion to pollution caused by plastic products.
It’s not surprising that MTN heads the list of the weakest shares given the crisis it’s experiencing in Nigeria. The fact that it’s indicated that it will oppose the claims of the Nigerian government has not impressed the market. As a business leader in Europe stated: “Governments in Africa tend to do irrational things, which exacerbates matters when they try to squeeze money out of the private sector.”
Among the shares that have broken through, only Sanlam and Netcare seem to be even mildly interesting. ■ firstname.lastname@example.org
Lucas de Lange is a former editor of finweek and an author of two books on investment.