From growth to value stocks

FALLEN: ASPEN DOWN 45% AND EOH SLIDING SINCE 2017

This is the second in a series detailing investor failings in ‘fallen angel’ stocks.

Pharmaceutical company Aspen began the year fearing it was the next target of Viceroy, the short-seller that took Steinhoff down. Speculators believed Aspen’s debt was too high and it had reached the end of its runway to acquire and grow. The time for growth stocks like this one or EOH, with their high price-earnings (PE) multiples, had ended. When Capitec was revealed as Viceroy’s target, Aspen’s share price recovered, but remained at pre-revelation levels. We should’ve paid attention.

Its share price rallied on selling its infant milk formula business, but collapsed the next day as shareholders expected a higher price.

Then its results showed Aspen lacked growth prospects. Aspen CEO Steven Saad said instead of paying off a majority of its debt, they would use the cash for acquisitions. Shares fell 30% over the next few days. Aspen’s share price is down around 45% for the year and looks to be on a historic PE of 10 and a forward PE of 9. We didn’t heed this warning.

Sales analysts’ target prices are revised lower. Saad has a history of being entrepreneurial, and the stock appears attractive. However, the market’s sceptical of his ability to find new growth opportunities. We’ll keep watching.

From January 2017, EOH’s share price began to come off. We thought we’d get lucky acquiring “cheap” stock if it lowered. It reached a level where we felt comfortable buying “stock at a good level”. It continued falling.

Chief financial officer John King wanted to chat to our traders and portfolio managers and that should have been a warning. He attempted to convince us nothing was wrong. Our traders were sceptical. We should have listened.

Founder Asher Bohbot left EOH. Then in December 2017 the share price fell for two weeks, then plunged to a R27 intraday low, allegedly due to King being sold out of a leveraged position in EOH stock, as he’d received a margin call. If true, it was unethical and lacked disclosure.

Now it makes sense. EOH was a growth stock and ran out of room to grow acquisitively. It became a value stock in a short period as the price de-rated. It had high debt levels and weak growth prospects. Investors had enough.

Bohbot has since returned. EOH plans to split into two separately-listed businesses: one under the EOH brand for traditional ICT operations; one under new brand Nextec for specialised, high-growth industry solutions. It remains to be seen whether this will make much difference. Stephen van Coller is the new EOH CEO. King resigned and new rules on employees’ share purchases and trading of EOH’s own stock were instituted. If you didn’t sell this stock in the R70 handle you probably still have it, and will have to wait a long while, given SA’s poor growth outlook and the trust that’s to be earned back.

If you still have EOH stock, it’s a long wait to selling it

Lee Kern is Cratos Capital assistant portfolio manager.

These are the author’s views and not financial advice.