Investors should ‘lean into wind’
CHANGE: BEST INVESTMENT OPPORTUNITIES COME FROM UNEXPECTED PLACES
There is huge rerating potential for SA stocks.
In 2008, Mondi’s headline earnings per share fell by 49%. The following year, they dropped a further 44%. Anybody who had been reading the headlines was not that surprised. Paper, it was widely reported, was a dying industry. Newspapers and magazines were increasingly being consumed online, records were being produced and stored digitally and mail services around the world were in decline.
And this was all exacerbated by the global financial crisis.
The outlook for a paper producer like Mondi was, therefore, bleak. The company’s share price more than halved during the 2008 sell-off, and did not bounce back in the 2009 recovery. It was still under water by the end of 2010.
Nothing in the news would have suggested that this had any reason to change. And yet Mondi has grown its earnings before interest and taxes to more than three times since 2007, and more than 20 times from the trough it hit in 2009.
The company’s shares have also moved – from R40 at the start of 2010 to over R320 today. That is a gain for shareholders of over 800%.
Do you know what you don’t know?
This may sound extraordinary, but this sort of story is really more common than most investors realise.
“Often you see this dislocation, where the outlook for something is really poor, but the subsequent returns are quite good,” says Pieter Koekemoer, head of personal investments at Coronation Fund Managers.
“A decade ago everybody thought fine paper is dead because all the advertising is moving online and there won’t be glossy paper printed magazines anymore,” he explains. “But what people failed to realise is that as advertising goes online, shopping goes online too and all the online purchases need to be packed in corrugated paper boxes.”
Mondi’s management was astute enough to see this shift happening. They noticed that no new paper mills were being built, and that many mills in Europe were being sold cheaply. “They acquired paper mills at really good prices and ended up in a dominant position to supply packaging material,” Koekemoer adds.
Look around
The lesson for investors in the current environment should be obvious. South Africa is beset with obvious risks and significant problems.
Subsequently, the market is treating the outlook for companies that operate in the country as extremely poor. The share prices of “SA Inc” stocks have been knocked down to especially low levels, regardless of their quality.
Chemicals company AECI is an excellent example. Over the past 30 years it has delivered higher shareholder returns and better return on equity than the Top 40.
Yet at the start of 2018, it was trading at a 50% discount to the wider market on a price-to-earnings basis. Over the course of last year, when the FTSE/JSE All Share Index returned 12%, AECI was up 30%.
Which way are you leaning?
There are many other examples in South Africa like this at the moment.
“The responsible thing to do is to lean against the wind,” Koekemoer says.
“Because this counter-intuitive principle plays itself out over and over again.”