Tech­ni­cal Study: Pes­simism still rules

But for value in­vestors this can be a time to pick up bar­gains.

Finweek English Edition - - Contents -

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. ■ ed­i­to­rial@fin­

Lu­cas de Lange is a for­mer edi­tor of fin­week and an author of two books on in­vest­ment.

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